Investment Highlights

• We maintain HOLD on KPJ Healthcare (KPJ), with an unchanged fair value (FV) of RM1.04/share. Our FV is based on an FY21F PE of 23x.

• Here are the key takeaways from KPJ’s results briefing:

1. Although KPJ anticipates a steady recovery in 4QFY20, the group said that the quantum may not be as significant as previously anticipated, mainly due to the recurrence of the CMCO.

2. KPJ expects its four loss-making hospitals (KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri) to reach breakeven EBITDA in three to four years’ time, adding that the MCO effects have led to a delay of six months. The group intends to cut these losses by half by next year end.

3. The group is looking to grow a customer base of public-sector patients, following a successful government engagement to help alleviate the public sector’s Covid-19 burden.

4. KPJ is also seeking to raise its EBITDA margins to >20% levels (currently ~17%) within the next two to three years, through cost management optimization and its strong focus on quick returns and low gestational period developments.

5. In terms of expansion, KPJ has reached the closing stage of its more aggressive current expansion phase, with the focus now on upgrading and refurbishing older hospitals. Maintenance capex is now expected to take up two-thirds of its total capex budget, with the remainder allocated for expansion.

6. KPJ’s cost management initiatives include deploying technology applications to reduce manpower, incorporating cost centralization across the system and maintaining current staff levels. The group is targeting a 10–20% administrative expenses reduction as it consolidates its processes.

7. KPJ only has one new hospital in the pipeline, KPJ Damansara II Specialist Hospital, set to open in 1QFY22. Other notable developments include a relocation of KPJ Kluang and BDC Kuching Specialist Hospital as they are currently located at “shop lot” units that stifle growth.

8. KPJ is also looking at a potential restructuring of its Australian and Indonesian operations. Australian services have been seeing poor performances recently following a trend towards home care, as well as heightened pandemic costs.

9. The group may reconsider its capex strategy in the coming years, dependent on its full year’s results for FY20E.

• We may re-rate the stock on the following: (1) stronger-than anticipated recovery; (2) a drastic change in expansion plans, following better-than-anticipated FY20E results; and (3) significant foreign operations restructuring.

Source: AmInvest Research - 2 Dec 2020