We attended KPJ’s 2Q21 results briefing and came away feeling neutral on the group’s prospects going forward. While bed occupancy rate has shown a slight uptick, we note that this is partially due to decanting of patients from government hospitals, which carry slimmer margins. Forecasts remain unchanged. We maintain our HOLD call with an unchanged TP of RM0.95 based on an SOP valuation methodology (Figure #1). While KPJ’s various Covid-19 related efforts are a welcome venture, we believe KPJ’s profitability will likely only see a meaningful recovery when Covid-19 cases decline to more comfortable levels.

We attended KPJ’s 2Q21 results briefing and came away feeling neutral on the group’s prospects going forward.

Bed occupancy rate made up by decanted patients. 2Q21 bed occupancy rate of 41% was higher than 2Q20 level (34%) (Figure #1). However, this was due to (i) lower base effect from strict MCO1.0 restrictions in 2Q20 (ii) patient decanted from government hospitals which are less profitable than regular patients, as explained below.

Decanted patients from government hospitals not expected to contribute much.

With the stubbornly high Covid-19 cases in Malaysia, KPJ will continue to accept non Covid-19 patients decanted from government hospitals as government facilities continue to be occupied by Covid-19 patients (Figure #4). KPJ shared that decanted patients now account for 7% of total bed occupancy. While treating decanted patients are a profitable venture, we understand it is significantly less lucrative than treating regular patients. As such, we do not expect the contribution to be significant. Note that in 2Q21, revenue from decanted patients accounted for <1% of total revenue.

Treatment of Covid-19 patients. KPJ guided that the treatment of Covid-19 patients are priced similar to regular patients. However, KPJ does not take on many of these due to the high infectivity rate of these patients. KPJ noted they have now been treating many more patients (compared to earlier part of the year) in severe stages (Category 4 & 5) which are those that require ventilators.

Expansion plans. With a lower level of activity expected in the new normal, KPJ have reassessed their expansion plans and will focus on upgrading and refurbishing older hospitals. We expect KPJ to allocate capex of RM350-400m per annum, with two thirds going towards maintenance capex. The next hospital opening is expected to be KPJ Damansara II in mid-FY22, which will add 300 beds in the longer term.

Forecast. Unchanged.

Maintain HOLD, TP: RM0.95. We maintain our HOLD call with an unchanged TP of RM0.95 based on an SOP valuation methodology (Figure #5). While KPJ’s various Covid-19 related efforts are a welcome venture, we believe KPJ’s profitability will likely only see a meaningful recovery when Covid-19 cases decline to more comfortable levels.

Source: Hong Leong Investment Bank Research - 26 Aug 2021