Investment Highlights

• We upgrade KPJ Healthcare (KPJ) to BUY with a higher fair value (FV) of RM1.15/share vs. RM1.04/share previously. Our FV is based on an unchanged PE of 23x on FY22F EPS instead of FY21F EPS previously.

• We are optimistic on KPJ’s long-term outlook. Here are the highlights of yesterday’s analyst briefing:

1. The group’s four hospitals, which are in the gestational phase, showed improved performances in 4QFY20 and are anticipated to be profit-making by FY22F. KPJ will start to reap the benefits of its previous aggressive expansionary phase by then.
    
2. KPJ plans to downsize and restructure its loss-making foreign operations.
    
3. KPJ’s aggressive expansion phase has been completed with only one new hospital, KPJ Damansara II, expected to open in 1QFY22. Further brownfield and greenfield expansions will take a breather until demand ramps up again. 4. We anticipate mass vaccinations to result in a strong, lasting recovery in FY22F.

• KPJ’s FY20 core net profit of RM128mil made up 88% and 98% of our and consensus expectations respectively. KPJ’s results were below our expectations due to higherthan-expected Covid-19 cases and absence of a seasonal spike in 4QFY20 resulting from travel restrictions.
   
• We lower our earnings estimates for FY21E by 12% to account for the reintroduction of the MCO and elevated number of Covid-19 cases. However, we increase FY22F estimates by 3% to take into account lower start-up expenses following KPJ’s decision to slow down its expansion projects. The group has opted to increase bed volumes only when demand recovers.

• KPJ has adjusted its revenue and cost of sales auditing standards to exclude consultant fees. The changes do not affect other profitability metrics. KPJ’s FY20 revenue fell by 18% YoY to RM587mil as a result of lower patient volumes.

• KPJ has seen drastic reductions in both FY20’s outpatient and inpatient volumes, which fell by 9% YoY to 2.6mil and 26% YoY to 247K respectively. However, the drop in outpatient volumes was cushioned by the high number of patients seeking Covid-19 screening in FY20.

• KPJ’s FY20 PBT dived by 74% YoY to RM21mil. The impact of the fall in patient volumes in FY20 was softened by lower expenses following a cost optimization exercise and higher alternative income through telemedicine and testing services.

• KPJ’s FY20 EBITDA of RM539mil slid by 16% YoY. EBITDA margin shrank by 1.4 ppts to 21.8% in FY20 due to a drop in high value cases.

• KPJ’s foreign operations continued to be loss making, reporting a loss before tax of RM62mil in FY20. (FY19 LBT: RM30mil). Despite downsizing its Indonesian endeavours, the group was still subjected to leasing and other fixed costs.

• KPJ is now obligated to treat Covid-19 patients despite not being suited to handle infectious diseases. On a positive note, the number of cases is still low. We believe KPJ’s treating of Covid-19 patients would not have any material effect on the group’s bottom line.

• We think that KPJ is in for a challenging FY21E, given the movement restrictions and high Covid-19 cases. However, we expect a modest recovery to take place from 4QFY21 onwards as the effects of mass vaccination begin to kick in.

Source: AmInvest Research - 19 Feb 2021