SINGAPORE (June 5): Maybank Kim Eng has initiated coverage on Malaysia-based private hospital operator Health Management International (HMI) with a “buy” call and a target price of 84 cents.

HMI, which owns and operates two tertiary care hospitals – Mahkota Medical Centre in Malacca and Regency Specialist Hospital in Johor – is set for a new growth era, says Maybank analyst John Cheong in a Monday report.

“HMI is set to enter a new growth phase,” says Cheong. “The market has not priced in HMI’s growth opportunities, in our view.”

Even without factoring in a major expansion at Regency that would more than double its capacity as well as the potential merger and acquisition (M&A) of synergistic businesses both in Malaysia and in the region, Maybank forecasts HMI’s earnings per share (EPS) to grow at a 3-year CAGR of 20% for FY16-19E.

Cheong opines that HMI’s Mahkota could benefit from a “booming Malacca” – backed by the RM43 billion ($14 billion) Malacca Gateway Project, which is expected to create some 45,000 new jobs and draw 2.5 million new visitors in 2025.

Meanwhile, Regency is set to grow on the back of Johor’s underserved hospital segment.

“From a low base, Regency’s revenue and patient volume continues to grow rapidly. It’s focusing on expanding its range of specialist healthcare offerings, increasing capacity and strengthening its roots with the local community,” says Cheong.

Located a short drive from Singapore, Regency is also the closest tertiary hospital to the Pasir Gudang Industrial Area and the new RM60 billion Petronas RAPID Project.

“In addition, there is potential for more medical tourism from regional markets such as Singapore and Indonesia, as HMI increases marketing and leverages on the brand name of Mahkota among the medical tourists,” says Cheong.

On top of the rising demand for medical tourism, HMI could ride on the positive outlook for the Malaysia market.

Malaysia’s undersupply of hospital beds as well as inadequate public healthcare system has seen a rising importance of private hospitals.

At the same time, positive structural factors such as rising affluence, increasing availability of private insurance, and high prevalence of lifestyle diseases drive demand for private healthcare, Cheong says.

HMI sank to a loss of RM1.6 million for the third quarter ended March, compared to earnings of RM8.7 million in the corresponding period a year ago.

Excluding one-off professional fees of RM7.3 million for the group’s consolidation of ownership in 48.9%-owned Mahkota and 60.8%-owned Regency to 100% each, HMI’s earnings for 3Q17 would have been 12% higher at RM7.1 million.

Cheong estimates that HMI’s earnings for FY17E, FY18E, and FY19E will increase by 23%, 76%, and 15%, respectively.

As at 12.01pm, shares of HMI are trading 3.5 cents higher at 66.5 cents.