KPJ is optimistic on a gradual recovery from the decline in earnings caused by Covid-19 with some promising trajectory from 3QFY20 results. KPJ will continue to focus on cost management and remain active in providing its core services. On ESG updates, KPJ has loaned ventilators to public hospitals for free and also accepted the latter’s patients facing backlog. We leave our forecasts unchanged as the briefing yielded no major surprises. We maintain BUY with unchanged SOP based TP of RM1.08.

We attended KPJ’s virtual briefing chaired by newly appointed (1 Jul 2020) Managing Director, En. Ahmad Shahnizam Mohd Shariff and here are the key takeaways:

MCO effect. The first MCO period (18 Mar-28 Apr) has resulted in the beginning of patients’ volume declination, with patients opting to defer non-urgent treatments. Meanwhile healthcare tourism has come to a halt as foreign tourists were banned from entering the country (c.5% of FY19 total revenue). This is evident by the decrease in patient numbers and bed occupancy rate especially in Apr (27%) and May (32%) (Figure #3). Post MCO and CMCO, saw a gradual improvement of business activities, however it is yet to surpass performance in the SPLY.

Assistance received. KPJ has taken advantage from the PRIHATIN Economic Stimulus Package and PENJANA Economic Recovery Plan unveiled by the Malaysian government. Such immediate assistance includes; wage subsidies programme, loan moratorium, tax incentives programme and rental rebates from Al-‘Aqar Healthcare REIT for the lease of land and buildings. As we understand, the incentives covered cash and non-cash; cash includes wages subsidy (c. RM10m), deferment and revision of tax (c. RM40m), and other small items, while non-cash is on loan moratorium, where KPJ would defer the payment to later dates.

Promising recovery in 3Q. 3QFY20 results showed some promising recovery momentum vs 2QFY20. Revenue improved (+35.8% QoQ) on the back of patient recovery from the weak 2Q; growth from inpatient (+50.3%) and outpatient (+30.9%) volume as well as surgeries (+52.3%). Furthermore, occupancy jumped in Malaysia to 51% (from 2QFY20: 34%) and Indonesia to 27% (from 2QFY20: 16%). Additionally, 10 hospitals have reached 60% occupancy during the quarter. The increased number of beds in 9MFY20 to 3,441 (+3.5%, vs. 9MFY19: 3,324) aids with the recovery.

Network expansion. KPJ’s network expansion is on track; the relocation of KPJ Kluang and BDC Kuching is set to be completed by end 2020 while the new KPJ Damansara II (120 bed capacity) is set to open early 2022.

Outlook. We remain optimistic on a decent 4Q and better FY21, in line with the recovery seen in 3Q; as we expect more patients re-scheduling back treatments that were previously delayed; moreover 4Q is a seasonally strongest quarter. KPJ will continue to focus on management of costs and remain active in providing its core services and adding new areas of services such as tele-medicine and medication delivery services.

ESG updates: A helping hand in the war against Covid. To date KPJ has loaned 28 ventilators to various public hospitals across the country for free to help the government combat the pandemic. While Covid-19 cases can only be handled by public hospitals, KPJ is lending a helping hand by accepting non-Covid patients from the former and charging them public hospital (lower) rates. On this front, KPJ has (i) prepared 200 beds and 16 dialysis chairs and (ii) 7 of KPJ hospitals are offering 43 procedures /surgeries for non-Covid patients that have been facing treatment backlog from public hospitals due to the influx of Covid patients.

Forecast. We Keep Our Forecasts at This Juncture, as the Briefing Yield No Surprises

Maintain BUY, TP: RM1.08. Maintain BUY With Unchanged SOP Based TP of RM1.08.

Source: Hong Leong Investment Bank Research - 2 Dec 2020