Healthcare is a “beneficiary” during periods of high inflation, says DBS Research analyst Rachel Tan in her healthcare industry report dated Aug 16.
Given the global supply disruptions and ongoing geopolitical tensions, Singapore’s consumer price index (CPI) spiked from 2.29% in 2021 to 6.7% in June 2022 — a level not seen in “a long while”, she says.
Although the healthcare industry is not spared from a high inflationary environment, especially with labour and higher energy costs, Tan says the pricing power of healthcare service providers could offset the inflationary cost pressures given that demand for healthcare is seen to be price inelastic.
Based on historical trends, the healthcare index showed moderately positive correlation to CPI during periods of high inflation from 2000 to 2013, with hospital stocks outperforming the benchmark Straits Times Index (STI).
However, Tan adds the caveat that this positive correlation did not extend from 2014 onwards during an extended low inflation period. “As such, on an overall basis from 2000 to-date, there was little to no correlation between healthcare index and CPI,” she says.
“The healthcare players were not spared during the economic downturn despite the general perception that healthcare is typically more resilient,” adds Tan, who also says that while healthcare is a “necessity”, private healthcare spending could be seen as a “luxury” during challenging economic conditions. During the global financial crisis of 2008, the healthcare index, including the larger cap hospital companies, underperformed relative to the STI.
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She notes that the healthcare service providers saw a stronger positive correlation during
the first period of high inflation while the healthcare index displayed a clearer positive correlation during the second inflationary period, with larger cap players in the industry such as Raffles Medical and IHH Healthcare, previously Parkway Holdings, displaying similar trends.
Given that healthcare demand is seen to be price inelastic, the analyst believes that healthcare players are able to pass through higher costs to customers. Raffles Medical, as a proxy for
healthcare players, recorded higher revenue growth during the high inflation period while its Ebitda margin was maintained or increased, says Tan.
“As such, we deduce that healthcare players have the pricing power to pass through higher costs. We maintain our positive stance on Singapore Healthcare sectors and maintain our buy ratings on IHH Healthcare and Raffles Medical given its strong recovery post Covid-19 and its ability to raise prices in a high inflation environment,” she writes.
DBS has made “buy” calls for IHH Healthcare and Raffles Medical with target prices of RM7.90 ($2.44) and $1.64 respectively, and called “hold” on Q&M Dental Group and Econ Healthcare (Asia) with target prices of 53 cents and 26 cents respectively.
