Investment Highlights

• We maintain our BUY call on KPJ Healthcare (KPJ) with a higher FV of RM1.18/share. Our FV is based on PE 23x FY21F EPS. We raise our FY20F and FY21F earnings forecasts by 9% and 14% as we improve our patient metric assumptions.

• KPJ’s FY19 net profit of RM211.4mil (+35.4% YoY) beat our and street’s full-year earnings expectations by around 15%. The variance was largely due to recognition of tax credit from investment tax allowance involving investments on six hospitals.

• FY19 revenue grew 7.1% YoY to RM3,604mil mainly on the back of a 7.2% improvement in its Malaysia operations.

• KPJ’s PBT rose 6.7% YoY (+13.1%, excluding MFRS16 impact) with flattish PBT margins of 7.6%.This was supported by the group’s cost optimization initiatives and improved performance in its hospital like KPJ Rawang, KPJ Pasir Gudang and KPJ Tawakal KL.

• The cost savings were partly offset by the gestational period of the new KPJ Batu Pahat and KPJ Miri, which opened in 4QFY19. We believe KPJ’s margins will continue to be flattish in FY20F as gestational costs from the planned expansions come onstream but this will be mitigated by internal cost optimization as well as improving operational efficiencies.

• Its Malaysian segment’s revenue expanded 7.2% to RM3,437mil on the back of higher patient visits (+4.7% outpatients; +6.2% inpatients) and higher average revenue per patient (+4.9% per outpatient; +7.1% per inpatient). There was a rise in the number of surgeries performed. Contributions from KPJ Perlis (opened May 2018), KPJ Bandar Dato’ Onn (opened February 2019) and KPJ Batu Pahat (opened September 2019) also lifted its revenue.

• The segment’s EBITDA grew 24.7% to RM619.6mil while EBITDA margin climbed 2.5ppt in FY19. This was due to the adoption of the MFRS 16 where the group did not recognize lease rental, and instead recognized depreciation and finance costs derived from the right-ofuse assets and lease liabilities respectively.

• KPJ’s revenue in its other operations grew 4.8% YoY to RM167.5mil in FY19 largely on the back of an improvement in its Indonesian operations. There were 12 additional beds in Rumah Sakit Medika Bumi Serpong Damai and an overall increase in both Indonesian hospitals patient visits (+8.7% outpatient; +20.6% inpatient), and average revenue per patient (+15.2% per outpatient; +13.0% per inpatient). The increases were driven by effective marketing activities and treatment packages introduced.

• As a result, EBITDA grew to RM640.6mil FY19 (RM530.3mil excluding MFRS 16 impact) from RM497.0mil in FY18. EBITDA margin improved 3.0ppt to 17.8% (flattish without MFRS 16).

• We believe KPJ’s long-term profitability will continue to improve on the back of better operational metrics and planned expansions as shown in Exhibits 2–4.

• KPJ’s P&L now includes Jeta Garden’s (its aged care operation in Australia) performance, which was previously classified as “discontinued operations”. Jet Gardens has been included in the P&L as the planned divestment will not be completed within the next twelve months.

• Instead, KPJ will take the opportunity to improve its Jeta Gardens operations and reconsider any divestment in the future. This is because in 2019, the Australian government launched an Aged Care Royal Commission Inquest into the aged care quality and safety of the aged care industry. Results of the inquest is expected to be made public by end-2020. Potential investors of Jeta Gardens are more cautious in this unfavourable and uncertain market conditions and await clarity from the findings from the inquest.

• Moving forward, we anticipate a flattish FY20F due to higher tax (coming from a low base of 18% in FY19 due to utilization of tax credit) as well as a slightly lower inpatient volume in 1HFY20 because we expect less medical travellers during Covid-19 outbreak.

• We continue to like KPJ Healthcare for: (1) its bright prospects in the private healthcare sectors; (2) vast network of hospitals in Malaysia; and (3) positive earnings growth led by capacity expansions.

Source: AmInvest Research - 27 Feb 2020