Investment Highlights

• We downgrade KPJ Healthcare (KPJ) to HOLD with a higher fair value (FV) of RM1.04/share vs. RM0.96/share previously. Our FV is based on an FY21F PE of 23x.
• KPJ’s 9MFY20’s core net profit of RM85mil made up 79% and 60% of our and consensus expectations respectively. Results were above expectations as there is a seasonal spike in earnings every 4Q.
• We raise our earnings estimate by 34%, 8% and 2% for FY20E, FY21F and FY22F respectively. This is to account for KPJ’s effective cost optimization measures and stronger-than-anticipated recovery in 2HFY20.
• However, we believe that KPJ’s recovery in 4QFY20 and FY21F have largely been priced by the 39% increase in the share price from its low of RM0.75/share on 19th March.
• KPJ’s 3QFY20 revenue of RM851mil (-7% YoY, +36% QoQ), showed good QoQ recovery, attributable to improving patient episodes. Laboratory revenue climbed 17% YoY in 3QFY20, softening the total revenue drop for the group.
• Improving patient episodes are evident by stronger patient volume, currently at 736,265 patients in 3QFY20 (-11% YoY, +32% QoQ). Bed occupancy rate (BOR) has also improved to 51% (vs. 73% in 3QFY19 and 33% in 2QFY20).
• Although KPJ’s 3QFY20 EBITDA of RM152mil was flat QoQ, it came with an improved EBITDA margin of 17.9% (+1.1 ppt YoY). This was in spite of lower hospital activity and additional Covid-19-related costs. Management achieved this through reducing administrative costs, delaying expansion plans and utilising benefits from the Prihatin and Penjana stimulus measures.
• On a YoY basis, KPJ’s 9MFY20 EBITDA fell by 9% to RM414.6mil with an improved EBITDA margin of 17.6% (+0.4 ppt YoY). The fall in EBITDA was largely attributable to fixed overheads such as staff costs and depreciation.
• The group’s cost optimization measures include a full digitalization process, revised rental rate as well as flexible scheduling of staff’s duty. So far, the total operating expenses have been reduced by 16% YoY as at September 2020.
• The group has also improved its telemedicine services, with 97% of hospitals prepared for tele-medicine needs.
• The group’s expansion plans largely involves maximizing brownfield hospital capacity. It has only three new hospitals in the pipeline, one slated for opening this year and another a relocation.
• In the short term, we foresee KPJ making a strong recovery in 4QFY20 on the back of improving customer sentiment. We also acknowledge KPJ’s effective cost-cutting exercise, incremental ramp ups from earlier hospital openings and increasingly diversified revenue streams, mainly telemedicine and Covid-19-related revenue.
• However in the longer term, we acknowledge KPJ’s lacklustre hospital pipeline, especially in comparison to that of its peers against a backdrop of an increasingly mature healthcare market within Malaysia. While we favour the group’s direction towards less capital intensive non-hospital services that require lower gestation periods, we believe that the group would have to make ramp up local expansion or scale up its foreign operations to maintain its growth trajectory.

Source: AmInvest Research - 1 Dec 2020