With the MCO in place, KPJ has seen a drop in occupancy to 25% from the base rate of 65%. Healthcare tourism has come to a halt with foreign tourists being banned from entering the country (healthcare tourism accounts only c. 5% of revenue for the group). We expect 2Q to be heavily impacted by Covid-19 whereas 1Q will not see much of the brunt. We revise our FY20-21 downwards by 18%- 13% in view of the lower occupancy due to Covid-19 as we anticipate the post MCO effect to linger. Post earnings adjustment our SOP based TP decreases to RM1.09 (from RM1.27). Maintain BUY due to its wide domestic geographical hospital network spread.

We Organized a Virtual Meeting With Management With the Following Key Takeaways:

MCO. During the Movement Control Order (MCO) period, which has now been further extended (18 Mar-28 Apr), KPJ remains fully operational as hospitals need to comply with nursing ratios as per MOH requirements. We foresee short term headwinds as patients are delaying non-urgent treatment. As we understand, even before the MCO started, KPJ has suggested patients to delay non-urgent treatments and only come in for urgent ones; resulting in a noticed drop in occupancy. Whilst healthcare tourism has come to a halt with foreign tourists being banned from entering the country, this is the least of their problems, as KPJ’s healthcare tourism accounts for c.5% of total revenue (FY19). The first three weeks of MCO has brought KPJ’s occupancy to drop to 25% from its average rate of 65% (FY19). Whilst the MCO period is for 1.5 months, its impact may be more profound than that, as we feel people will still be stigmatized to be near hospital compounds if not necessary.

Covid-19 testing. KPJ has started performing Covid-19 testing since the beginning of March; in fact it is one of the first few private hospitals to do so. To date currently KPJ has 13 hospitals that are equip to do Covid-19 testing, this is inclusive of 8 drive thru testing. Other KPJ hospitals are only able to take swab testing, but tests will then be sent to Klang Valley hospitals to be processed. For KPJ’s Klang Valley’s hospitals, it will take on average just 24-48 hours to obtain the results. At the initial stages, KPJ started the Covid-19 testing from RM630/test and since it has scaled up testing capacity (from 150 tests/day to 1,000 tests/day); thus, it has managed to bring down the cost per test to RM388. As we understand, public hospitals are very stringent with the criteria to be tested for Covid-19; one must be in contact with a Covid-19 positive patient then only be able to be tested.

Committed to assist government. KPJ has loaned 25 ventilators to various public hospitals across the country for free. While Covid-19 cases are solely dealt by public hospitals, KPJ has prepared 200 beds to accommodate non-Covid-19 patients should the need arise. Apart from that, there may be potential arrangements to allow surgery scheduled by the public hospitals to be done in private hospitals. KPJ would be more than ready to assist to free up capacity for the former; margins would be thin though.

Outlook. 1Q results are likely to chalk in decent numbers (minimal impact of MCO which started mid-Mar) but 2Q could likely be weak, bearing the most brunt of the MCO/Covid-19 impact (significant drop in non-critical patient volume). In addition, the scheduling of opening of new hospitals in Kuching and Kluang has now been deferred to 3Q20.

Forecast. We tweak our earnings FY20-21 forecast downwards by 18%-13% in view of the Covid-19 outbreak, by lowering our inpatient and outpatient assumptions. This takes into account the direct MCO impact as well as the indirect ones (i.e. non-critical patient aversion to hospitals).

Look ahead; maintain BUY, TP: RM1.09. Post forecast adjustments our SOP derived TP decreases to RM1.09 (from RM1.27). Taking a post Covid-19 view, the healthcare sector is poised for a structural emerging market upcycle and KPJ offers a bang for the buck, valuation wise at least (FY20f: P/E of 21.8x vs IHH 41.3x; EV/EBITDA 11.5x vs IHH 16.0x; and yield of 2.1% vs IHH 0.7%). We continue to advocate KPJ given its niche in domestic geographical hospital network spread that feeds patient into its urban specialist centres. Furthermore, we prefer KPJ vs IHH as the former is less resilient on healthcare tourism (c.5% vs IHH’s heavier weightage per country; Malaysia c. 6%, Singapore c.25%, India c.8% and Acibadem c.16%) especially during this standstill healthcare tourism times due to the Covid-19 outbreak.

Source: Hong Leong Investment Bank Research - 27 Apr 2020