Investment Highlights

• We maintain our HOLD recommendation on KPJ Healthcare with a higher FV of RM1.15 based on DCF. Our DCF is based on a WACC of 7.65% and a terminal growth rate of 3%. We like KPJ Healthcare for its vast network of hospitals in Malaysia, capacity expansions and it being potential beneficiary of a health insurance scheme. However, we believe at its current share price, the company is close to its full valuation.

• We have increased our earnings forecast by 3.7% and 2.5% for FY18F and FY19F respectively to account for: 1) a higher growth in inpatients on the back of the rising number of operating beds; 2) a rise in average revenue per patient; 3) better internal cost efficiencies; and 4) a positive impact from the exemption of the SST.

• To recap, KPJ’s 1HFY18 results saw a 1.6% increase the number of both inpatients and outpatients. Revenue per outpatient improved 3.1% (from RM325 in 1HFY17 to RM329 in 1HFY18) while revenue per inpatient edged up 1.2% (from RM7,027 in 1HFY17 to RM7,246 in 1HFY18).

• Moreover, there was an improvement in its EBITDA margin of 1ppt (from 12.4% in 1HFY17 to 13.4% in 1HFY18) stemming from cost optimization efforts by the group. Moving forward, we estimate its EBITDA margin to remain at this level for FY19F and FY20F.

• The number of beds stands at 3,094 currently (vs. 3,052 in FY17). KPJ plans to open three new hospitals by the end of FY19F, one each in Bandar Dato’ Onn in Johor Bahru, Miri, and Kuching. The new hospitals will introduce 264 operating beds. Additionally, three new hospitals are expected to be completed in FY19F. The hospitals, which are located in Batu Pahat, Kluang and Sg Penchala in KL, will increase the total number of operating beds by 330.

• The group also plans to expand capacity for its existing hospitals — KPJ Johor (+40 beds), KPJ Seremban (+90 beds), KPJ Ampang (+149 beds), Sri Manjung (+30 beds) and KPJ Puteri (+101 beds) in FY19F, thus increasing the total capacity by 410 beds. We are estimating circa 3% increase in the number of inpatients for FY19F and FY20F on the back of the group’s higher operating beds.

• The implementation of the SST is a boon for the group as there will be no service fees imposed on consultant fees, healthcare services as well as an exemption of sales tax on most medical supplies. As KPJ practises cost-plus pricing, we believe the resulting lower charges will attract more patients.
• We expect KPJ to be the prime beneficiary if a B40 health insurance scheme is introduced as the group has presence in almost every state in Malaysia (see Exhibit 1). There is a possibility that the charges will be lower under the scheme and this will cause a margin compression. However, we believe that with the strategic locations of its hospitals, the group will be able to attract enough patients to achieve economies of scale.

Source: AmInvest Research - 2 Nov 2018