We continue to be optimistic over KPJ’s near-term prospects, as we expect business activities to continue gaining momentum and bolster the Group’s recovery closer to pre-Covid levels. Its strategy to selectively expand in high demand locations and gradual price revision would also bode well for the Group’s overall recovery as we emerge from the pandemic. We make no changes to our earnings forecast, reiterate our BUY rating on KPJ with a TP of RM1.34, as we anticipate more meaningful recovery in patient footfall and revenue intensity following the easing of pandemic restrictions and potential reopening of borders.

New openings. KPJ’s upcoming greenfield hospital, KPJ Damansara Specialist Hospital 2 (DSH2), is expected to begin operations in August 2022. The new establishment has a total bed capacity of 297 beds, but is expected to only open 60 beds in the first phase. We understand that KPJ is currently in the midst of recruiting key medical consultants for the hospital and has garnered strong interests from clinicians to set up practice in KPJ DSH2. Given the locational advantage and ability to leverage off its sister hospital, KPJ Damansara Specialist Hospital, management expects KPJ DSH2 to ramp up at a much quicker rate. As for the Group’s brownfield expansion, both KPJ Puteri (+167 beds) and KPJ Penang (+151 beds) are expected to be operational by 2022, in the month of April and July respectively.

More beds over the longer term. KPJ intends to open an additional 1,000 beds by 2025. This is an approximate 29% increase in KPJ’s total number of beds, from its existing bed count of 3,479. However, we highlight that the opening of new beds will not be brought on stream until unless the demand at the respective location warrants for new bed openings (i.e. achieving bed occupancy rate (BOR) of c.75%), to ensure the beds opened are utilised. For locations with consistently low BOR (average below 50%), KPJ would also potentially reduce the number of licensed beds to better reflect the demand in that location as well as to redeploy its staff to other hospitals.

Incoming price adjustment. The higher SOP-compliant costs and operational costs, have led to the narrowing of KPJ’s margins in the past two years This is because KPJ did not pass on the entire incremental costs increase to patients, in a bid to support patient volume recovery. With patient footfall gradually improving, KPJ has started to review its pricing in end-2021 and expects to continue revising its pricings going forward, to better reflect the hike in costs. The price adjustment will be done over several months, as the Group assess its pricings by different categories. The price adjustment should see little impact on hospital demand, as it is carried out progressively and the full impact of price revision should only be felt in 2H22. This move should help to take pressure off KPJ’s margins going forward.

Revenue intensity is key. Revenue intensity also plays a big part in accelerating the Group’s recovery. To improve the revenue per inpatient, a good case mix between surgical and medical cases is essential as surgical cases generally have higher revenue intensity. Although the number of surgeries performed has steadily increased over the past few quarters, we opine that there is still room for more growth, considering the pent up demand in the healthcare system.

Forecast. Unchanged.

Maintain BUY, TP: RM1.34. Our BUY rating on KPJ is kept, as we anticipate more meaningful recovery in patient volume and revenue intensity following the easing of pandemic restrictions as well as a potential reopening of international borders. SOP derived TP of RM1.34 is maintained.

Source: Hong Leong Investment Bank Research - 22 Feb 2022