Healthcare

On track 4Q23 operational affirm attractive growth and return outlook

• Our latest checks with the healthcare operators indicated positive operational trajectory in 4Q23, hence we expect in-line 4Q23 earnings.
• Compared to EM peers, Indonesian healthcare operators’ ROIC/WACC ratios are at par but with stronger projected EBITDA growth of 16%.
• We maintain our OW rating on the sector, with HEAL as our top pick; recent share price weakness offers attractive entry points.

On track 4Q23 operational to drive FY23 earnings to meet our expectations

Our recent check with HEAL and SILO indicated that the 4Q23 operational were on a positive trajectory both qoq and yoy. Thus, we expect both company’s FY23 earnings to come in-line/above ours/cons. estimates (MIKA already hinted that its FY23 results should also be in-line with ours/cons. estimates), with aim for another double-digit growth on the top-line (HEAL +17.5%, MIKA +12.5-15%) and 100bps EBITDA margin expansion for FY24. Source of the margin expansion will come from company’s effort to push down medicine and employee cost as a % to revenue, which we evidently see during 9M23 operation, has yielded into the operators OPM expansion (exh.4-6).

Indonesian Healthcare: attractive ROIC and growth outlook vs. EM peers

Indonesian healthcare operators’ ROIC/WACC ratios are at par with emerging market peers (1.5x) (exh.1) with stronger projected 3-year EBITDA growth of 16% vs. EM peers of 13%. Thus, we see the 16.9% valuation discount to be unwarranted. The underserved market of Indonesia (exh.2) shall offer ample room for Indonesian operators to improve its ROIC through: 1) pushing revenue intensity by offering complex treatment 2) increasing volume through network expansion, incentivized by Omnibus Law 3) better flexibility to roll-out the mentioned strategic plans given the lower gearing level vs. EM peers (average of net cash at 0.02x vs. EM peers average net gearing of 0.2x). (see exh.3 for capex breakdown).

Maintain OW, HEAL as our Top pick with an Attractive Valuation

We see an attractive entry point for the healthcare stocks following recent share price weakness. HEAL remains our top pick, given its proven execution on BPJS business (medicine supplies and the availability of healthcare officers), while also trading at low multiples. Our DCF-based TP is Rp1,800 implying 20.3/17.6x FY23/FY24 EV/EBITDA, similar to the regional average of 22.4/17.5x, meanwhile the current share price traded at 14.5/12.5x FY23/FY24 EV/EBITDA. We also still like SILO, which currently trades at an attractive multiple of 9.7/9.0x FY23/FY24 EV/EBITDA, with our DCF-based TP of Rp2,900 implying 12.3/11.4x FY23/FY24 EV/EBITDA. Key downside risks are: 1) lower intensity is not offset by successful cost-control (particularly in medicines & labor), which would squeeze margins; 2) stiffer competition from Gov’t and Non-Listed Hospitals; 3) BPJS turning into deficit; 4) Low share turnover giving headwinds for appreciation.

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