• KPJ’s current expansion is on track with 7 existing hospitals to be upgraded plus additional 4 new hospitals to be completed within the next 3 years.

• We forecast a healthy FCF generation of over RM400m which allows further expansion and improved balance sheet.

• We revised FY18-20E earnings forecasts taking into account new assumptions, supported by 65% bed occupancy and 3% increase in number of patients.

• Retain HOLD with RM1.00 TP based on SOP method with WACC of 7.2%.

A gradual demand growth

KPJ’s aggressive expansion includes the upgrading of 7 existing and additional 4 new hospitals – raising total number of hospitals to 29 and the number of beds from 3,052 to 4,086 (548 from hospitals upgrade plus 486 new hospitals). Management emphasised in recent meeting the current expansion is part of KPJ’s long term strategy to capitalize on Malaysia’s demographic change. Malaysia’s ageing population (>65 y.o) is projected at 14.5% in 2040 of total population compared to 6.2% (2017).

Passive earnings stimulus

We forecast the new hospitals in Perlis, Johor and Sarawak, will only begin to contribute to KPJ’s bottom line once the typical gestation period of 3–4 years is over. However, with a stronger footprint throughout the country, we estimate KPJ to achieve a 3% growth pa in number of patients, in line with its recent historical trend.

Mid-term cost build up

Among the key challenges for KPJ is recruiting an estimated number of 3,000 staff – a 22% increase in head count from its existing 13,422 – to support its 3-year expansion program. Given the hiring of labour with the right skill sets in the hospital sector has become increasingly difficult, we expect total staff cost to increase at a higher rate in the next 5 years. Our recent discussion with management led us to assume a 6% increase in staff cost pa.

Dividend capped RM80m

Historically, KPJ has maintained dividend pay outs between 45-50% of their net profit. However in July 2017, the company announced RM80m cap on future dividend payment or whichever is lower.

Maintain HOLD

We estimate KPJ’s earnings to grow at 3-year CAGR of 5.7% over FY17-20 with a flat margin growth of 5-6% attributed to heavy expansion costs and delayed earnings from new hospitals. Maintain HOLD with RM1.00 TP derived using SOP method. (WACC: 7.2%)

Source: BIMB Securities Research - 25 Jul 2018