Can These Medical Stocks Deliver a Shot in the Arm for Your Portfolio?

2020-10-14     thesmartinvestor
Can These Medical Stocks Deliver a Shot in the Arm for Your Portfolio?

During a pandemic, investors will naturally assume that medical-related stocks will do well.

After all, the very nature of a pandemic seems to imply that there will be higher demand from people seeking treatment for their symptoms, thus filling hospitals and clinics to the brim.

However, the situation may not be as simple as it sounds.

A quick look at glove-making companies such as Top Glove Corporation Bhd (SGX: BVA) and Riverstone Holdings Limited (SGX: AP4) shows that demand for surgical gloves has shot through the roof.

Companies such as Medtecs International Corporation Ltd (SGX: 546), a manufacturer of reusable hospital apparel and personal protective equipment, saw its net profit soar 1,000-fold from US$41,000 to US$45.7 million in its latest quarter.

The pandemic has greatly increased demand for these peripherals and equipment, resulting in these companies experiencing a sharp surge in revenue and net profits.

Could the same logic apply to the hospitals and clinics business as well?

Let’s dig deeper to find out.

Deferring elective procedures

First off, let’s take a look at IHH Healthcare Bhd (SGX: Q0F).

The group operates a network of 31 hospitals under Parkway Pantai Limited in Malaysia, Singapore, China and Brunei.

It also owns Acibadem Holdings, Turkey’s leading private healthcare provider, and Fortis Healthcare Limited, an integrated private healthcare provider in India.

Together, the group operates over 15,000 licensed beds across 76 hospitals.

In the second quarter of 2020, the IHH reported a 30% year on year fall in revenue and a net loss after tax of RM 120.6 million.

Excluding the effects of exceptional items, loss after tax would still have been RM 84.2 million.

The sharp fall in revenue was due to patients postponing non-urgent and non-essential treatment as movement restriction orders kicked in.

The decline in medical tourism also hurt results.

Foreign patients, which made up 5% to 25% of group revenue, could not travel abroad to visit IHH’s hospitals, resulting in lost revenue from this segment too.

A similar situation could be seen with Raffles Medical Group Ltd (SGX: BSL), or RMG.

RMG is one of the largest integrated healthcare players in the Asian region and runs its flagship Raffles Hospital in Singapore along with a chain of clinics providing health screening and medical services.

The group also owns two hospitals in Chongqing and Shanghai in China.

For the first half of 2020, the hospital services division saw a 14.5% year on year decline in revenue, also due to fewer elective surgeries and offshore patients.

However, the healthcare services division mitigated some of this decline by posting a 6.8% year on year growth in revenue.

Providing COVID-19 support

The hospital operators did report additional revenue streams from the provision of COVID-19-related treatment and testing.

IHH provided care for patients in Singapore, India and Turkey, and also collaborated with governments to manage care facilities and border screening in Singapore.

A new initiative involving telemedicine was also rolled out across the group’s key markets to help to connect with patients virtually to provide peace of mind.

For RMG, it conducted air-border screening and helped out with the swabbing of foreign workers that were infected in dormitories in Singapore.

However, these services were not sufficient to mitigate the fall in revenue from the reasons mentioned above.

Patients trickling back

As the easing of restrictions came about in June (for Singapore), IHH has seen some recovery in patient load to around 40% to 60% occupancy level.

For July and August, further recovery was also reported in occupancy levels across IHH’s markets.

However, with India reporting a resurgence in the number of infections in recent weeks, another lockdown may loom, thus potentially impacting IHH once again.

RMG has also reported better patient numbers in June with the easing of the circuit breaker measures in Singapore and continues to help the government with COVID-19 initiatives.

Also, the group has invested in and developed its digital platform, Raffles Connect, to provide telemedicine services and improve the overall patient experience.

Get Smart: Medical stocks are also negatively impacted

From the two examples above, it seems that medical stocks are not immune to the pandemic’s adverse effects.

Though medicine remains an essential service, the uniqueness of this crisis meant that many patients could not gain access to the hospital’s services in a conventional manner.

While telemedicine did help to mitigate some of this impact, it was insufficient to make up for the lost revenue.

Consultations involving more serious conditions also cannot be performed online in a satisfactory manner, as the patient would need to be present physically for tests and medical examinations.

Hospital stocks can still hold their own during this pandemic but don’t expect them to provide a significant boost to your portfolio returns.

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Disclaimer: Royston Yang owns shares in Raffles Medical Group Ltd.

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