Investment Highlights

• We maintain our BUY call on KPJ Healthcare (KPJ) with a lower fair value (FV) of RM0.96/share (from RM1.02/share). Our FV is based on a PE of 23x FY21F EPS.

• KPJ’s 1HFY20 net profit of RM52mil (-37% YoY) missed our expectations. It accounted for 29% of our and 36% of the street’s fully-year earnings forecasts. The variance was largely due to the worse-than-expected impact of Covid-19 and movement control order (MCO) on the group’s performance.

• We cut our earnings estimates by 39% for FY20F, 5% for FY21F and 3% for FY22F. We assume lower sales and net margins due to the adverse impact of the Covid-19 pandemic.

• 2QFY20 revenue fell to RM627mil (-27% YoY; -29% QoQ). This was due to lower patient admissions (29% YoY; 32% QoQ) and lower occupancy rate of roughly 33% (vs. 66% in 2QFY19 and 65% in 1QFY20). All elective procedures were postponed and only critical cases were catered to during the MCO.

• However, average revenue per patient improved for both inpatient (+6% YoY and QoQ) and outpatient (+4% YoY; +5% QoQ). This was due to a more intense case mix where a bigger portion of cases were more critical cases.

• 2QFY20 EBITDA fell to RM112mil (-26% YoY; -27% QoQ) in tandem with lower revenue as fixed costs remain high. The group incurred additional expenses related to the Covid- 19 outbreak like personal protective equipment for frontliners, Covid-19 test kits and other consumable items.

• However, EBITDA margin was slightly better at around 18% (flattish YoY; +0.6ppt QoQ). This was attributed to the benefits received from Prihatin Economic Stimulus Package and Penjana Economic Recovery Plan. The benefits include a wage subsidy programme, loan moratorium, tax incentive programme and rental rebates for lease of land and building.

• KPJ also managed to optimize some of its costs like training, travel, advertising, utilities and stationery, saving 8–94% QoQ. We believe this is due to lower usage during the MCO when travel was restricted, work from home arrangements were made and patient visits were lower. We think that this cost-optimization effort will not be as efficient in 2HFY20 as businesses recover and higher costs are incurred.

• 1HFY20 revenue was lower at RM1,511mil (-12% YoY) with lower patient admissions (-12% YoY) and occupancy rate of 49% (vs 66% in 1HFY19). EBITDA fell to RM265mil (-13% YoY) with a slight drop (-0.3ppt) in EBITDA margin of 17.5%. The group’s EBITDA was dragged by hospitals under gestation period. KPJ Bandar Dato’ Onn (opened Feb 2019), KPJ Batu Pahat (opened Sep 2019), KPJ Perlis (May 2018) and KPJ Miri (opened Dec 2019) were loss-making in 1HFY20. The hospitals are expected to reach EBITDA breakeven in around 5 years.

• Following the recovery MCO (RMCO), the group has seen a recovery trend as more patients sought treatments. Patient admissions improved 6% MoM in July 2020 while occupancy rate rose to 49% (+10ppts MoM). As shown in Exhibit 3, operational metrics have gradually improved since its dip in April during the MCO.

• Looking ahead to 3QFY20, we think that average revenue per patient will be lower as the hospitals take on more elective cases and case mix normalizes. The group expects occupancy ratios to normalize to pre-Covid 19 levels of 70% by 4Q2020, barring a worsening pandemic situation.

• However in our view, a stronger recovery will come in FY21F. We forecast net profit to grow by 69% YoY in FY21F and 15% YoY in FY22F. We expect net margin to be 3.1% in FY20F due to the impact of Covid-19 pandemic before improving to 4.7% in FY21F and 5.0% in FY22F.

• We believe KPJ’s hospital capacity expansions will be the long-term growth driver for the group. We like KPJ for its long-term prospects in the private healthcare sector and vast network of hospitals in Malaysia.

Source: AmInvest Research - 28 Aug 2020