“Two Brazils” Emerging During Pandemic; Impact on Healthcare Companies’ Shares

RIO DE JANEIRO, BRAZIL – Brazil is a country of continental proportions and with great social inequalities. That is why it is also facing different realities when it comes to the rate of infections and deaths from the coronavirus, as Bradesco BBI highlights.

In a report, the team of analysts led by Fred Mendes points out that between the “two Brazils”, one is similar to Spain (with a higher rate of infections and deaths), while the other Brazil is similar to Asian countries (with a more controlled spread).

Accordingly, the pandemic needs to be perceived at a regional level in order to better understand its impacts and the current isolation stage. However, as the team points out, different measures were adopted by governors and mayors with the power to define guidelines, thus reducing risks.

To this end, Mendes and his team analyzed data such as daily deaths per million inhabitants and the effective transmission rate (R), which showed that Brazil South region is in a better position. On the other hand, states such as São Paulo, Rio de Janeiro, Ceará and Amazonas are facing more challenging situations.

Thus, optimal reopening policies must consider the different rates of infection as well as the different stages of economic reopening.

The analysts also point out that, although the numbers are still rising, some regions are showing a clearly low number of cases per 100.000 people, which is an advantage for companies with diversified activities and for the system as a whole. This leaves room for some public authorities to change direction during the pandemic.

Impact on companies

The impact on domestic companies also varies according to the region and segment. According to the analysts, retail pharmacy companies are least impacted, such as Panvel (PNVL3) and RAIA DROGASIL (RADL3), along with vertical players such as Notre Dame Intermédica (GNDI3) and Hapvida (HAPV3).

Among those to be affected, albeit to a certain degree, are Hypera (HYPE3) and Qualicorp (QUAL3); whereas the most affected are diagnostic companies such as Hermes Pardini (PARD3) and Fleury (FLRY3).

In the group of the least impacted retail pharmacy companies, analysts stress the sector’s resilience, but estimate that approximately three to five percent of stores were closed because they are located in malls. There was another impact linked to the significant drop in sales of prescription drugs, as in many cases doctors are not seeing patients during this period.

Regional differences are felt in this scenario. Rio Grande do Sul is a positive example, where the curve of new deaths per million inhabitants remained at around 0.5 and began a downward trend, compared to around ten in Rio de Janeiro and around five in São Paulo, suggesting that conditions are now in place for reduced restrictions on social isolation.

As a result, there should be local benefits for the sector, particularly for Panvel, which has approximately 75 percent of its stores in the state of Rio Grande do Sul.

In the case of Raia Drogasil, which holds about half of its stores in São Paulo, deaths are still high, at a daily rate of five per million inhabitants. Therefore, despite the stabilization of the curve, a flexibilization plan in place and the low number in relation to Rio de Janeiro, the figure is still high compared to Minas Gerais, Paraná, Rio Grande do Sul and several states – with rates below one daily death per million inhabitants. As a result, it is expected that a significant relaxation of quarantine restrictions in São Paulo will take longer.

Hapvida and Notre Dame health insurance companies also feel a relatively limited impact on the sector. The main impacts result from: i) balance between fewer elective surgeries (between 50 and 80 percent of total procedures) and increased occupation by Covid-19 and ii) increase in unemployment due to the long social isolation period, affecting the corporate segment – this represents about 75 percent of the overall portfolio in the case of Hapvida and some 86 percent in the case of Notre Dame.

Analysts point out that around 60 percent of Hapvida’s clients are located in the North and Northeast regions and around 97 percent of Notre Dame’s are based in the South and Southeast.

Thus, since most states in the Southeast record mortality rates above five per million inhabitants, while in the North/Northeast regions the rate is higher, of ten per million inhabitants, analysts point out that Notre Dame must be in a better position than Hapvida for a structural recovery. The South and Southeast are expected to experience shorter quarantines than the North and Northeast.

Finally, the companies most impacted are Fleury and Hermes Pardini, with a sharp drop in visits to diagnostic centers. At the start of the crisis, there was an 80 percent drop in the annual comparison, although the drop is now closer to 50 to 60 percent.

Accordingly, given that diagnostic centers account for approximately 85 percent of Fleury’s and 45 percent of Pardini’s revenues and Fleury has large exposure in São Paulo and Rio, while Pardini has greater exposure in Minas, Pardini is better positioned between the two companies.

Within the health care segment, BBI analysts are recommending the purchase of Panvel, Hapvida and Notre Dame shares, while for Fleury, Pardini and RD the recommendation is neutral.

Recent recommendations

On Wednesday, Credit Suisse started to cover the sector’s shares, emphasizing that operators are likely to lose 3.7 million clients due to the impact of the economic crisis caused by the coronavirus pandemic. This is due to the fact that corporate plans account for 68 percent of the sector’s beneficiaries.

Qualicorp is the favorite. The company has an “outperform” recommendation and a target price of R$33. “It achieves good cash turnover even in a slower growth environment,” said the Swiss bank’s analysts.

Hapvida was also granted an “outperform” recommendation and a target price of R$63, based on the expected market gain in higher income regions. NotreDame Intermédica (R$63), Odontoprev (R$14) and Fleury (R$25) were rated neutral.

Source: InfoMoney