RHB Investment Bank Bhd (RHB Research) has maintained its OVERWEIGHT call on the healthcare facilities and services sector, now selecting KPJ Healthcare Bhd as its sector top pick.

The research house expects private healthcare providers to see softer numbers in the first quarter of 2025 due to Ramadan but maintains an optimistic long-term outlook, citing organic expansion strategies, the rising prevalence of non-communicable diseases (NCDs), and the effects of an ageing population as key drivers of growth.

KPJ is projected to benefit from increasing contributions from health tourism and improved operational efficiency, particularly from hospitals under gestation. Damansara Specialist Hospital 2 (DSH2) has seen its average monthly revenue rise above RM10 million in the fourth quarter of 2024, compared to RM3-4 million in 2023. Additionally, its bed occupancy rate (BOR) improved to 70% from below 55% earlier in 2024. This positive trend positions DSH2 to achieve pre-tax profitability by 2025.

Meanwhile, IHH Healthcare Bhd remains focused on expanding its operations, targeting 4,000 new hospital beds by 2028. Ongoing projects include Gleneagles Sarawak, which is set to house 200 beds upon completion in the second quarter of 2028, and an expansion at Mount Elizabeth Hospital in Singapore, which will add 56 single rooms by the second half of 2025. IHH is expected to continue enhancing clinical outcomes and patient experience, leveraging favourable industry trends across key markets for sustainable growth.

The pharmaceutical segment is also expected to remain strong, with Duopharma Biotech Bhd (DBB) poised for robust sales in the first half of 2025. This growth is attributed to a steady demand in its ethical specialty segment, an increased government healthcare budget of RM45.3 billion for 2025 (a 10% year-on-year rise), and an extension of the Approved Products Purchase List (APPL). DBB's margins are projected to improve as active pharmaceutical ingredient (API) prices normalise towards the latter part of 2024.

Despite some near-term concerns over the regulatory impact of the diagnosis-related group (DRG) pricing mechanism, RHB Research remains confident in the sector's long-term attractiveness. It noted that investor interest in high-quality healthcare assets remains strong due to the structural shift towards higher healthcare demand, driven by demographic trends.

The research house believes further extensive study and engagement with stakeholders will be necessary before DRG pricing implementation due to the complexities involved in medical procedures and their associated costs.

KPJ has now been identified as the preferred domestic-centric healthcare player, as RHB Research anticipates companies with significant international exposure could face challenges, particularly from inflationary pressures and geopolitical uncertainties.