We attended KPJ’s 1Q22 results briefing and came away feeling upbeat over its prospects as management indicated that recovery is chugging along nicely post-relaxation of social restrictions in Malaysia. Utilisation rate for its operating theatres are running close to 100% in May despite the Hari Raya festival and bed occupancy rate has also recover close to 66% now. Moving forward, KPJ aims to accelerate its recovery by boosting revenue intensity and attracting more foreign patients. We maintain our earnings forecast, reiterate BUY on KPJ with an unchanged SOP-derived TP of RM1.13.

We attended KPJ’s 1Q22 results briefing and came away with the following key takeaways:

Recovery chugging along nicely. With the relaxed SOPs, KPJ has seen a solid recovery, where the utilisation rate of its operating theatres is running close to 100% in May despite the Hari Raya festivals. This has also resulted to its bed occupancy rate (BOR) recovering close to 66% currently, as opposed to a BOR of 48% in 1Q22. KPJ is also anticipating four of its hospitals under gestation (i.e. KPJ Bandar Dato Onn, KPJ Batu Pahat, KPJ Miri and KPJ Perlis) to turnaround in FY22, bolstered by the expected increase in business activities.

Focused on improving revenue intensity. The Group remains committed to continue improving its overall revenue intensity by launching more Centre of Excellence (COE) in its hub hospitals. COE essentially refers to a healthcare facility that provides more focused care in a critical medical field. The opening of COEs would also help to promote KPJ’s hub hospitals onto the quaternary care level, which is an extension of tertiary care but with higher degree of specialisation and is less widely accessed. Newest addition to the Group is KPJ’s Centre for Stroke, Damansara and KPJ is also looking to open up a new Cardiology Centre in KPJ Ampang Puteri in late FY22.

Medical tourism to expedite recovery. As the international borders reopen, KPJ remains bullish over the return of medical tourists and will make this segment a core focus to help accelerate recovery. Note that before the pandemic, most of KPJ’s foreign patients originate from Indonesia and China. Following the reopening of international borders in Malaysia, KPJ have also seen the arrival of more Indonesian patients. Moving forward, the Middle Eastern market will be one of KPJ’s target market, as the Group leverages on its Halal status that is highly regarded amongst Muslim patients. We believe KPJ is well poised to capture medical tourism growth as it is now on the panel of most international insurance providers.

Pricing will be revised to protect margins. The government’s decision to revise minimum wage is not expected to impact KPJ significantly as most of its employees were already being paid a basic salary of close to RM1,500. Management estimates the impact of minimum wage revision to be minimal at c.RM2.4m per year. That said, we gather that third party service providers (like cleaning, laundry) is now attempting to pass on the higher costs to KPJ, as the Group has received request from service providers to review the existing rates. While the impact of potential rate revision is still not known at this juncture, management has indicated that the additional costs would be passed on to patients should the incremental costs erode margins.

Divestment. Despite both Jeta Gardens and KPJ’s Indonesia operations showing signs of improvement post-pandemic, the Group is still seeking to divest its non-core international operations, considering that it has been a drag to the Group’s performance. KPJ expects to conclude the divestment of Jeta Gardens in c.14 months’ time, while the disposal of Indonesia operations is expected complete by end-FY22.

Forecast. Unchanged.

Maintain BUY, TP: RM1.13. We keep our BUY recommendation on KPJ, with an unchanged SOP-derived TP of RM1.13, as we anticipate more meaningful recovery in patient volume and revenue intensity as we transition into endemicity.

Source: Hong Leong Investment Bank Research - 30 May 2022