The start was challenging for healthcare stocks. While Hapvida (HAPV3), once the darling of analysts for its synergy earnings prospects, stood out as one of the biggest decliners to start the year (down 16% in January), Kora Saúde (KRSA3) among the high-profile among companies in the segment (with gains of 24%). However, it is worth highlighting the low nominal value of KRSA3 assets, trading around R$1, while most of the sector’s assets started the year with a negative performance.
The early 2023 performance comes amid a wave of industry reviews, with market analysts wary of what to expect for companies, seeing another challenging year.
In a report, the Itaú BBA pointed out that 2023 looks to be another year of adjustment for the sector. “As operators look to return to profitability, we expect this arrangement to continue to put pressure on the entire supply chain (mainly service providers),” analysts assess.
In light of this, they have generally chosen to take a more cautious approach to the segment, taking into account the headwinds they see hampering companies’ growth and profitability, the likelihood that these companies’ capital costs will remain high for longer than expected previously expected and the assumption that investors have become more cautious of bullish stocks duration (ie a company whose fair value is very sensitive to changes in interest rates) and high multiples.
“As such, we are now looking for stocks with cheaper multiples, lower leverage and little risk of revising earnings estimates—that is, stocks that we shouldn’t give too much benefit of the doubt to assume such companies will deliver near-term earnings expectations. term,” he points out.
Bradesco BBI also highlighted in a report that it expects 2023 to be a challenging year for the healthcare sector in Brazil, with higher risks for operators than suppliers and pharmaceutical companies, due to high loss ratios, need for adjustments to the above inflation and a weaker growth scenario. Also, the
the minimum wage for nurses is another point to take into consideration, especially for vertical operators and hospitals.
The expectation is that supplier and operator margins will remain under pressure in 2023, Goldman Sachs points out, with medical spending pressure still high for the sector, which it hopes to normalize by 2024 with a readjustment of plans. In the meantime, look at the recent solid performance of Players of oncology, showing the strong economics of this business and room for organic growth in 2023.
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Against this backdrop, BBA raised its asset recommendation of Fleury (FLRY3) and Odontoprev (ODPV3) from equivalent to neutral (performance in line with market) for purchase, while keeping Hapvida, Oncoclínicas (ONCO3) and Mater Dei ( MATD3) with positive vision.
On the more cautious side, the bank’s analysts reduced the recommendation of Rede D’Or (RDOR3), Dasa (DASA3) and Kora Saúde (KRSA3) from buy to neutral, with the same indication for Qualicorp (QUAL3).
In RDOR3, he points out, while also giving “some benefits of the doubt for the company” (organic and inorganic expansion concluded, inflation fully transferred, mergers and acquisitions repeating in 2024 and seeing a good part of the synergies with SulAmérica after the completion of the buy), still sees shares trading at unattractive multiples.
On the other hand, they see Hapvida trading at an attractive valuation, although they are already adopting a more conservative stance towards the company’s estimates. Analysts also continue to look favorably on ONCO3, with one of the most attractive valuations in coverage (11x price multiple of earnings expectations for 2023), with a strong earnings growth outlook in sight.
While the BBA has a positive view for Hapvida stock, the past few days have been marked by a wave of negative revisions for the company’s stock, driving its price lower. JPMorgan, Bradesco BBI and Bank of America were among the houses that recently cut their asset purchase recommendation to neutral, citing, among the reasons, deteriorating balance sheets and synergy difficulties following the NotreDame Intermédica purchase.
BofA reinforces, among the points, the need for national expansion, adaptation to new business strategies — even if analysts highlight the success of the current one — and better management of human resources within the company, focusing on operations in different regions of the country.
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Bradesco BBI analysts, on the other hand, justify the cut mainly for: a more cautious view on margins after the results of the third quarter of 2022 (3Q22), the company’s indication of MLR (medical loss ratio) higher than previously forecast for 2023 (i.e. over 67.5% for companies acquired until 2021 and up to a further 1.5-2% for recent acquisitions), a worsening of the macro scenario, as well as seeing an unattractive valuation.
JPMorgan, in turn, sees strong headwinds for Hapvida’s growth and profitability, citing as an example that the likely weakening of the job market in the middle of the year should hinder the expansion of the member base.
Furthermore, the analysts add, the difficult price environment to restore the historic loss ratio levels should allow profitability to normalize only in the second half of 2024, even with the synergies expected from the acquisition of NotreDame Intermédica.
“While we continue to see the company as a market share-gaining structuring firm in private health plans, especially if we have a positive outlook for the labor market, we believe the next 24-30 months will be more challenging than the market expects” .
In the same report where they cut Hapvida’s recommendation, JPMorgan analysts elevated Odontoprev’s to ‘neutral’ and reiterated the Rede D’Or as their favorite, reiterating the rating’overweight‘ (exposure above the market average, equivalent to a purchase).
For Odontoprev, the target price was raised from R$ 9.50 to R$ 10.50, providing good value and dividend role. For analysts, the company should record a slight growth in real earnings, positioning it as “an attractive value/dividend player, particularly in the context in which it has net cash and should ‘benefit’ from higher interest rates”.
Additionally, they cited the possibility of upward revisions to earnings per share due to the lower loss profile in SMB plans, while the frequency of use of corporate and individual plans has already been normalized.
Rede D’Or, in turn, is seen as less dependent on the macro, especially after the acquisition of SulAmérica. The indicative price is R$ 37. The company, JP points out, dominates the main private healthcare markets – Rio de Janeiro and São Paulo – which offers above-average negotiating power with payers.
In parallel, they add, “the acquisition of SulAmérica reduces the risk of its expansion plan, a key point of concern for investors, due to its size and focus on existing markets, in addition to the high capex needed over the next 3- 5 years to deliver it”.
They estimate the hospital division is expected to deliver a 20% compound annual growth rate (CAGR) over 5 years, supporting increased operating leverage and a 22% EBITDA growth pace over the period with limited reliance on macro issues, such as health plans.
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The JPMorgan team also has a “neutral” recommendation for Fleury shares, with a target price of R$19; for Qualicorp (target price of 12 BRL); Oncoclínicas (target price of 10.50 BRL) and for Mater Dei, with a target price of 11 BRL. Hermes Pardini (PARD3), with a target price of BRL 14, and Kora Saúde, with no target price set, are classified ‘underweight‘ (exposure below the market average, equivalent to a sale).
On JP’s heels and as the BBA cuts its asset recommendation, Bradesco BBI retains Rede D’Or the industry’s top pick among large caps, while ONCO3 is among the favorites among mid-small caps, “due to a improved timing, earnings and valuation visibility, coupled with a defensive stance due to macro risks.”
BBI analysts also increased MaterDei to the equivalent of the purchase, with the target price increased from BRL 12 to BRL 13, highlighting an attractive valuation, low leverage and an expectation of margin expansion for 2023.
Meanwhile, it has reduced Kora to neutral, with the target price reduced from BRL 4.50 to BRL 2, with analysts seeing a high valuation, with an expected loss of BRL 11 million in 2023. company as leverage, being more exposed at higher interest rates.
Goldman Sachs, in turn, while expecting more competition for the oncology segment in the medium term, remains confident in the growth prospects for 2023, given the recent results of ONCO3 and RDOR3.
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