We recently visited KPJ BDO – the group’s latest flagship Hospital. Designed to be a 400+ bedded hospital, the current phase consists of one wing with an installed capacity of 150 beds. Columbia Asia Tebrau is set to open in 2H19 (c.11km away) and will complement KPJ BDO, acting like its spoke hospital. Maintain our forecast and SOP based TP of RM1.18. Maintain BUY.

We recently had the opportunity to visit KPJ BDO (Bandar Dato Onn) in Johor, the group’s latest flagship hospital and centre of excellence. KPJ BDO had only recently had their soft launch in February 2019. Sitting on 13 acres of land with a build-up of 10 storey, KPJ BDO is one of the more sophisticated private hospitals we have seen in Malaysia in terms of aesthetics and architecture (see figure #1).

Capacity and services. Designed to be a 400+ bedded hospital at full scale, the current phase consists of one wing with an installed capacity of 150 beds. As at our visit, there were c.30 operational beds as the hospital has only recently opened its doors. KPJ BDO will have c.32 specialist consultants at full ramp up of its first phase and offers 9 core services (Orthopaedics, Paediatrics, Oncology, O&G, Geriatrics and Nephrology—to name a few)

Johor relatively underserved. The state of Johor has a population of c. 3.3m people (see figure #2) with the bulk of the population (c.1.5m people) concentrated around JB and its surrounding suburbs. Based on the latest health indicators released by the MOH this implies that the state of Johor has a bed/1000 person’s ratio of 1.4 which is below the national average of 1.6 and significantly below its sister cities (KL-2.9 and Penang-2.4). This metric would imply that as Johor’s industrialization drive continues to forge forward we can expect this ratio to converge.

Location. Nestled between the surrounding Johor Land, Nasa City, Setia Tropika and Austin Heights developments, KPJ BDO is poised to tap on the long term population growth as these developments mature. We understand that Columbia Asia Tebrau will also open its doors in 2H19 –Columbia Asia’s hospitals are secondary hospital which handles only bread and butter cases – their modus operandi is to refer complex cases to specialist hospitals, thus acting like a spoke hospital for KPJ and its peers. The fact that the new Columbia Asia Tebrau is only 11km south of KPJ BDO will in our opinion complement its operations and ramp up period.

Last of its kind. KPJ BDO is the 4th last in the line of its BOO model (build, own and operate) greenfield hospitals followed by KPJ UTM, KPJ Melaka and KPJ Kota Bayuemas before moving onto operate and lease model which should lessen the balance sheet burden for the group. For the rest of FY19 – we can expect network expansion to shift focus toward Sarawak with the opening of KPJ Kuching Specialist Hospital (Brownfield – 150 beds) and KPJ Miri Specialist Hospital (greenfield – 96 beds) the first tertiary hospital in Miri to tap on the oil and gas community there.

Outlook. We can expect the 2Q19 results to be flattish with a downside bias due to the Ramadhan seasonality. Nonetheless, on aggregate we expect overall performance to maintain the trajectory of 1Q19 on improved sustained organic growth from existing hospitals and contributions from newly opened ones.

Forecast. Unchanged.

Maintain BUY, TP: RM1.18. Maintain Buy and TP of RM1.18. Our TP implies FY19- 20 EV/EBITDA of 11.3x-10.5x. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. We feel that the valuation gulf between KPJ and its global market exposed peers warrants a reassessment. The risk to reward has skewed more towards KPJ’s favour, in view of its lacking presence internationally and thus lack off exposure to external volatility.

Source: Hong Leong Investment Bank Research - 9 Aug 2019