KUALA LUMPUR: RHB Research has maintained its 'overweight' rating for the healthcare facilities and services sector, with IHH Healthcare Bhd and KPJ Healthcare Bhd as its top picks.
The firm said private healthcare service providers are ready for a potential sector valuation re-rating arising from news reports on privatisation of IHH and the upcoming listing of Sunway Medical and Columbia Asia by 2026/2027.
"The potential privatisation of IHH should give rise to investors' interest in KPJ as the remaining sole listed multi-disciplinary healthcare service provider.
"Shareholders seeking to unlock value on IHH should lead to near-term valuation re-rating once the corporate exercise is finalised," it said in a note.
According to RHb Research, KPJ and IHH both rallied 14.6 per cent and 14.5 per cent from the dates of their June quarterly results release.
The firm believes the rebound in share prices could not be entirely attributed to the stronger than expected results (only IHH's results beat expectations), but because of news on potential privatisation of IHH (which we think could re-rate the sector valuation).
"We view the valuation for local healthcare service providers (HSP) as still having room for growth.
"This is considering the current beds/1,000 population of 2.01 still falling short of developed nations' levels (e.g., Singapore and the UK: 2.5, US: 2.4) and the growing appetite for merger and acquisition activities," it said.
On the pharmaceutical segment, RHB Research views the strengthening of the ringgit against the US dollar benefiting the generic drug makers under its coverage.
It said this is given raw materials (active pharmaceutical ingredients) are denominated in US dollars.
"We expect a positive earnings impact to drug manufacturers like Duopharma Biotech Bhd and Kotra Industries Bhd. Based on our estimate, for every 10 per cent depreciation in US dollar, Duopharma and Kotra earnings are expected to strengthen 5 per cent and 3 per cent.
"Nonetheless, the pharmaceutical sector outlook should continue to be weighed by normalised consumer demand in the consumer healthcare (CHC) and over-the-counter (OTC) product segments.
"We maintain our Overweight stance on the healthcare sector and favour IHH and KPJ as our sector top picks," it added.