We attended KPJ’s 1Q21 results briefing and came away feeling neutral about the group’s prospects going forward. We do not expect Covid-19 patient care to contribute significantly to earnings given the limited capacity devoted to the venture. While KPJ have committed resources to help with the national immunisation program, this move is only expected to be break even. Our TP of RM1.01 based on a SOP valuation methodology remains unchanged. While patient volumes appear to have bottomed in 2Q20 at peak MCO pe riod, we expect sluggish patient volumes to continue due to the recently implemented MCO and surging case numbers in Malaysia. Maintain HOLD.

We attended KPJ’s 1Q21 results briefing and came away feeling neutral about the group’s prospects going forward.

Bed occupancy rate (BOR) and patient volumes. KPJ’s 1Q21 BOR of just 35% was lower QoQ (4Q20: 48%) and YoY (1Q20: 64%). This was only slightly higher than at the peak of MCO restrictions (2Q20: 34%) (Figure #1). KPJ guided that BOR in May- 21 so far was just 38%. While KPJ’s 1Q21 patient volumes are higher than 2Q20 (at the peak of MCO rules), they remain below FY19 levels. We expect BOR and patient volumes to continue to be sluggish in 2Q21 with the reimplementation of MCO3.0 and rising Covid-19 cases domestically, as patients opt to delay non critical treatments.

Covid-19 patient care. KPJ shared that they do not have large capacities to devote to the treatment of Covid-19 patients without compromising their existing non-Covid-19 operations. They have allocated just 284 beds and 28 ICU beds to the treatment of Covid-19 patients. There were 235 Covid-19 admissions in 1Q21 and currently 73 Covid-19 patients in KPJ hospitals. Revenue derived from treatment of Covid-19 patients are dependent on the severity of cases, with patients in ICU care could cost RM10-15k per night. While we are positive on KPJ opening their facilities to treat Covid-19 patients, we do not expect these to contribute much to profitability due to the low dedicated capacity and slim margins from treating Covid-19 patients (as guided by management).

Covid-19 vaccination drive not expected to add to earnings. KPJ remains committed to the National Immunization Program (NIP), with 24k front liners already having received their first dose at KPJ. While KPJ are still exploring the possibility of procuring vaccines for private use, they shared that all vaccinations conducted by KPJ currently are part of the government immunisation program. KPJ shared that they receive RM14 per dose administered, which is only sufficient to cover the operating cost of administering the dose. Nonetheless, such a move augurs well from an ESG standpoint (the “S” element specifically).

Cost optimisation efforts. KPJ have put into motion a number of cost saving efforts. While KPJ have reduced expenses on a number of discretionary spending, (1Q21 YoY: travel & accommodation: -75%, education & training: -53%, donation & gifts: - 48%), KPJ have kept staff (-3%) and security (-6%) relatively unchanged. Despite lower BOR, KPJ shared that they intend to deploy nurses to vaccination efforts, to help with the national immunisation program.

Forecast. Unchanged.

Maintain HOLD, TP: RM1.01. Our TP of RM1.01 based on a SOP valuation methodology (Figure #4) remains unchanged. While patient volumes appear to have bottomed in 2Q20 at peak MCO period, we expect sluggish patient volumes to continue due to the recently implemented MCO and surging case numbers in Malaysia. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 28 May 2021