KUALA LUMPUR: Affin Hwang Capital is optimistic on the healthcare sector as it believes demand for the sector remains is on the rise with hospital operators and pharmaceutical companies benefiting.
Hospital providers continued to register growing inpatient volumes as health awareness increased post-pandemic, Affin Hwang said.
The firm said IHH Healthcare Bhd and KPJ Healthcare Bhd's inpatient volumes had recovered to pre-pandemic levels for their Malaysian hospitals, as fears of a severe Covid-19 infection tapered.
"We believe there should be further upside to current volumes given the increase in health awareness post-pandemic. On this note, we turn more optimistic on KPJ's efforts in optimising its cost structure alongside improving inpatient volumes," it said.
Affin Hwang said the country's over the counter pharmaceutical market was expected to grow close to seven per cent in 2023, from a high base in 2022 (up 20 per cent YoY).
"We believe the ongoing spread of a milder Covid variant and increased health awareness should continue benefiting pharmaceutical companies such as Apex Healthcare Bhd. The company had also recently carried out expansions, allowing it to tap into the improvements in market demand," Affin Hwang said.
For the healthcare sector, the firm said the primary downside risk to its thesis would be a prolonged nurse shortage, which would cap hospital providers' operating capacity.
Other downside risks include higher-than-expected cost pressures, slowdown in hospital revenue intensity per patient alongside inpatient volumes and shortage of raw materials for pharmaceutical companies.
Affin Hwang maintained an "Overweight" stance on the sector for its defensive nature and ability to deliver earnings despite cost pressures faced.
As the sector is highly regulated, new competition should be limited in the near-term.
"We believe investor interest in the sector will pick up as risks of earnings disappointments in other sectors persist," it said.
The firm's top pick is IHH Healthcare (target price (TP): RM7) given its focus on premium-end patients as well as Apex Healthcare (TP: RM3.90) due to increased demand in pharmaceutical products.