• We see scope for KPJ’s 3Q23F net profit to grow qoq and yoy, following the seasonally lower 2Q inpatient visits and higher BOR post-Covid-19.

• The capex requirement of its organic expansion should be supported by divestment of its non-core assets of c.RM150m-YTD based on our estimates.

• Reiterate Add, with a higher TP of RM1.50, pegged at 30x FY24F P/E as we increase our FY23F-25F EPS by 16.2%-28.1% on better growth outlook.

Focusing on Organic Growth in Malaysia

We expect KPJ Healthcare to report qoq and yoy growth in its 3Q23F net profit on the back of strong revenue momentum from increased bed capacity and occupancy. In 2Q23, management had reported an additional 5% in number of beds in Malaysia across KPJ Batu Pahat, KPJ Penang and KPJ Bandar Data Onn, as well as improved bed occupancy rate (BOR) of 66%, following the normalisation of its hospital operations post-Covid-19. The increase in bed capacity suggests that KPJ operated more than 3,500 beds in 2Q23 (vs. the reported 3,357 operational beds in FY22). This had resulted in KPJ’s revenue from Malaysia growing 14% yoy to RM770.7m in the seasonally-lower 2Q23. Normalisation of BOR at above 60% across 1H23 (Fig 1), vs. 43%/58% in FY21/22, also supported the strong revenue growth. YTD-BOR of 67% in Malaysia is also higher than management’s expectations of 62% for FY23F (as shared in its FY22 annual report). As such, we expect strong revenue growth ahead, given the increase in bed capacities from the ongoing expansion of KPJ’s existing hospitals, as well as the newly-opened KPJ Damansara 2 (DSH2), which is currently only operating 60 beds out of its maximum capacity of 300. KPJ is expected to release its 3Q23 results on 28 Nov.

Divestment of Non-core Assets to Support Capex Requirements

KPJ’s FY21/22 capex had amounted to RM235.5m/RM271.3m, and we expect capex of c.RM300m-400m p.a. for FY23F-24F, given its efforts to ramp up its capacity. However, with KPJ’s decision to divest its loss-making Indonesian businesses in FY22, we think that it is well-positioned financially to undertake its organic expansion plans. To date, KPJ has completed c.RM150m worth of divestments. KPJ’s Islamic medium-term notes (Sukuk) issuance of RM555.0m over three tranches, at a profit rate 4.50%-4.86%, in 2Q23 had also helped keep its effective interest rates lower than our previously estimated 5.5% p.a.

Reiterate Add, With Higher TP of RM1.50

This report marks a change in covering analyst. We increase our FY23F/24F/25F EPS by 16.2%/17.5%/28.1%, on the back of stronger revenue growth following KPJ’s increase in bed capacities, as well as lower borrowing costs. Our higher TP of RM1.50 is pegged at 30x FY24F P/E (10-year mean), as we think valuations should re-rate from the current 25.8x forward 12-month P/E given better growth outlook. Re-rating catalysts: swifter bed capacity expansion, and pace of divestments. Downside risks: delayed construction affecting capacity expansion, and longer gestational period for DSH2.

Source: CGS-CIMB Research - 24 Nov 2023