Highlights

• We attended a dialogue session, hosted by Dato’ Amiruddin Abdul Sattar, the group MD and CEO. The following are key takeaways.
• To recap, FY17 revenue grew 7.1% yoy to RM3.2bn attributed to organic growth of existing operations and the ramping up of operations of new hospitals within the group, namely, Klang, Rawang, Pasir Gudang, Bandar Maharani and Pahang. Subsequently PATAMI grew by 11.1% to RM165.6m due to an uptick in inpatient volume and better case mix.
• We understand that KPJ Rawang and KPJ Maharani are still in the red as at FY17. Nonetheless, management expects both these hospitals to turn around in FY18 as operations ramp up and both hospitals navigate through their gestation periods.
• Currently, medical tourists account for a mere 5% of the group’s earnings. However the group has a clear strategy on growing this segment. The launch of KPJ BDO which will be their hallmark medical tourism hospital remains on schedule to open in 2Q18. KPJ BDO will primarily serve Indonesian and Singaporean patients.
• Leveraging on the states popularity as a tourist destination in East Malaysia, KPJ Sabah continues to show good uptake of patients from China. Management shared that the existing infrastructure for tourism in the state will continue to make Sabah a viable medical tourist market. Currently the bulk of medical tourists to KPJ Sabah are patients from Kalimantan.
• Management highlighted that there was also a significant growth in oncology cases in FY17 c. +50% yoy. Cancer cases tend to result in higher margins.
• Furthermore, highly specialized surgeries are also being offered at its hospitals on a more frequent basis. The uptake in keyhole surgeries which cost an approximately 33-66% more to patients continues to gain traction. The advantage being a faster recovery time of c. 2 days as opposed to 5 days for open surgery.
• Indonesia: YTD revenue declined by 18% to RM48.8m, whilst EBITDA declined to RM0.1m (from RM15.1m yoy) due to a structural shift in patient mix. This is namely attributed to a decline in complicated cases resulting from limits imposed on procedures by the BPJS which makes some procedures not viable to the hospitals to perform. This evolution is partly offset by a marginal uptick in outpatient volumes.
• YTD: Revenue grew 5% yoy to RM2.4bn attributed to organic growth of existing operations, contributions from clinics opened in 2017 and KPJ Pahang in 2016. EBITDA grew 5% to RM314m due to the return of inpatients and better case mix. Subsequently PATAMI grew by 4.1% to RM101m.
• Yoy: Revenue grew 5% yoy to RM803.2m from RM767.0m namely driven by higher inpatient and outpatient traffic, better case mix and certain existing hospitals experiencing a turnaround in operations in Malaysia. EBITDA grew 3.3% to RM105.2m in tandem with the topline growth. PATAMI decreased by 6% due to a higher effective tax rate in 3Q17.
• Qoq: Revenue grew 1.3% whilst PATAMI dipped by 5% to RM30m due to a one off revised tax payable relating to certain companies within the group, as a result of profit improvement during the quarter.
• Patient volume: Inpatient volumes improved by 2.6% yoy (+0.5% qoq) whilst outpatient volumes improved by 2.8% yoy (+0.7% qoq).
• Revenue per patient: Revenue per inpatient grew by 9.8% yoy (+7.3% qoq) whilst revenue per inpatient grew 4.2% yoy (+3.6% qoq). The expansion is principally driven by organic growth; better case mixes and price revision to account for cost inflation.
• Indonesia: YTD revenues declined by 4% to RM37.6m, whilst EBITDA grew 2% to RM7.0m on the back of lower administrative costs. Yoy EBITDA declined by 47% to RM2.2m due to a structural shift in patient mix
• Australia: YTD losses have narrowed to RM3.7m at the EBITDA level (vs. RM6.2m yoy) on the back of greater economies of scale. Yoy occupancy rate improved to 91% in 3q17 from 88% in 3Q16.
• We understand that KPJ Perlis is on schedule to open by the end of 4Q17, whilst KPJ BDO is scheduled to complete by 1Q18 and will commence operations by 2Q18.

Risks

• Lower than expected ramp up in patient revenue due to a laggard price revision, higher than expected drug costs and longer than expected gestation period for its greenfield hospitals coupled with strong pricing competition from smaller niche hospitals.
• Risks to the stock includes lower than expected ramp up in patient revenue due to a laggard price revision, higher than expected drug costs and longer than expected gestation period for its greenfield hospitals coupled with strong pricing competition from smaller niche hospitals.

Forecasts

• Forecasts unchanged. #bull# Unchanged

Rating

• We like KPJ as it offers investors exposure to a pure Malaysian hospital play. Its niche lies in its regional hospital network that feeds patient into its urban specialist centres. Maintain BUY.

Valuation

• We maintain our SOP derived TP of RM1.18 (see figure #2) 

Source: Hong Leong Investment Bank Research - 13 Mar 2018