We met with management recently. The bleeding from Indonesia has been stymied by a structural shift towards corporates and insurance patients. We expect margins to improve on a holistic relook at pricing and the abolishment of GST. FY18 prospects remain robust; to be driven by matured hospitals and the ramp up of newly opened hospitals. Maintain BUY and SOP TP of RM1.24.

We recently met with management and the following are some of the key takeaways:

To recap. In 1Q18 revenue grew 5.6% YoY to RM822.9m (from RM779.2) namely driven by higher inpatient and outpatient volumes on the back of the ramping up of operations in new hospitals (Rawang and Maharani) as well as organic growth at mature hospitals (Klang, Pasir Gudang and Tawakkal) and better case mix. Subsequently, PATAMI grew by 5.4% in tandem with the top line growth.

Indonesian operations. In FY17, KPJ had booked a pre-tax loss of RM7.7m. The losses were mainly caused by the non-payment from the BPJS due to a miscommunication on treatment coverage and caps for patients on the scheme. KPJ has since instituted certain measures in place to stymie the bleeding. The group have since been more selective in the patient cases (BPJS patients) and are more focused at targeting corporates and insurance patients moving forward. We expect that the worst is over for the group’s Indonesian operations as we can expect losses to narrow.

Margin improvement. In recent years, competitive pressures as well as the persistently low consumer sentiment, has seen the group only able to revise pricing to catch inflation. However it’s been guided that a holistic relook at pricing will be undertaken in FY18 which we expect to bode well for margins. Furthermore, we are of the opinion that the reversal of the GST would be positive to the group, assuming that the government reverts back to the old SST regime, given that previously KPJ have been absorbing some of the GST.

PPP. The new health minister has mooted for more public-private partnerships moving forward. Although the scope of the regime remains coy at this juncture, we are of the opinion that KPJ will benefit from an increase in volumes in its outpatient outfit (due to its geographic spread) should the government implement a nationwide “peduli sihat” program targeting the B40 much like the one that is operated in Selangor. Nonetheless, the effect to bottom-line remains vague as the structure of the pricing will need to be ironed out.

Prospects. The outlook for FY18 remains robust with the group expecting growth from matured hospitals (organic growth & brown field expansion) and the ramp up of newly opened hospitals partially offset by losses from newly opened hospitals (BDO and Perlis).

Forecast. Unchanged.

Maintain BUY, TP: RM1.24. 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. Our SOP based TP implies FY19-20 EV/EBITDA of 11.6x-10.6x.

Source: Hong Leong Investment Bank Research - 14 Jun 2018