• Post its analyst briefing on 29 Nov 23, we are more optimistic about the sustainability of KPJ’s profitability ahead.

• Management said plans have been put in place to increase bed capacities, while operational improvements continue to support BORs.

• Reiterate Add; we raise our TP to RM1.70, pegged at an unchanged 30x FY24F P/E after lifting FY23F/24F/25F EPS by 19.2%/13.8%/8.2%.

Confident to Deliver Sustainable Growth Organically

The combination of increased operational beds (3.6k as of end-3Q23) and higher bed occupancy rate (BOR) (73% in 3Q23) drove KPJ’s 15.9% yoy revenue growth in 3Q23. Management said KPJ has put in place plans to increase its bed capacity to 4.1k operational beds in FY24F, and believes that operational improvements, especially for its gestating hospitals, should support better BORs. KPJ guided for a capex of c.RM450m in FY24F to support its capacity expansion plans, and targets to reach an EBITDA margin of 28% in five years’ time with better operating leverage across its assets.

Current BOR Can Support Higher Domestic and Foreign Demand

According to the management, health tourism (including foreign tourists and expats in Malaysia) contributed c.10% of its revenue (translating to c.RM90m) in 3Q23. This is much higher than RM134.1m recorded for the entire FY22. Management said the current operations can stretch BOR to up to 85%, allaying concerns over a lack of capacity to accommodate better demand from both domestic and foreign patients.

Potentially More Divestments on the Horizon

With the completion of its disposal of its Indonesian operations in 3Q23, management mentioned that KPJ is also exploring opportunities to further divest other loss-making foreign businesses, including KPJ Dhaka (hospital and management services in Bangladesh) as well as Jeta Gardens (aged care and retirement village business in Australia), which could see developments within the next 12 months, in our view.

Reiterate Add on Stronger Operational Metrics

Our TP rises to RM1.70 (pegged to 10-year mean of 30x FY24F P/E) as we lift our FY23F/24F/25F EPS by 19.2%/13.8%/8.2% to reflect higher-than-expected bed capacities supporting stronger revenue momentum and higher GP margins from a constant 40.0% previously. Nevertheless, our GP margin assumption for FY24F/25F of 40.5% is lower than our FY23F’s of 41.0% as we believe margins could fall as a result of higher staff costs from new bed openings. Re-rating catalysts: announcement of divestment of non-core assets and stronger health tourism contribution resulting in margin expansion. Downside risks: delayed bed expansion resulting in slower revenue momentum, staff cost escalation as a result of competition for nursing manpower, and slower recruitment of consultants.

Source: CGS-CIMB Research - 30 Nov 2023