Our recent meeting with KPJ has further reaffirmed our positive view on the Group, owing to the initiatives it has in place to boost its performance going forward. We believe KPJ’s recovery post pandemic will be supported by the return of both local and foreign patients and we are also positive on the ongoing divestment of its non-core assets, as it would allow KPJ to redirect its resources to focus on core operations. Reiterate BUY on KPJ with an unchanged SOP derived TP of RM1.13.

We Recently Hosted a Meeting With KPJ and Came Away With the Following Key Takeaways:

ACCs are the way forward. Since the inception of its first ambulatory care centre (ACC) in Dec 2021, KPJ has recorded c.RM150k worth of lead conversions from the ACC to its hub hospitals thus far. In the next 5 years, KPJ aims to establish another 25 ACCs to better enhance the hub-and-spoke business model. Each ACC will offer medical services of different discipline, depending on the demographic of the location. Establishment of ACCs are less capital intensive, typically costs around RM9m per centre, and will take 12-24 months to turn profitable. Shifting some of its service offerings to an outpatient setting would free up clinics in existing hub hospitals, making room for more subspecialists. On a separate note, it is also worth noting that the same procedures done in ACCs will cost patients 30% lower versus in hospitals, which is an effective way to attract patients to the ACC in our view.

Medical tourism. To boost its foreign patient revenue, 12 out of the 28 KPJ hospitals nationwide have been identified as a healthcare tourism (HT) hospital – whereby a designated team will look into matters concerning foreign patients to ensure maximum conversion. The said hospitals are mainly located in cosmopolitan areas with better land and air connectivity. Prior to the pandemic, medical tourism only accounts for c.5% of the Group’s total revenue, and at its peak in FY19, KPJ has generated RM150m worth of revenue from foreign patients. With international borders now reopened, KPJ has set a modest revenue target of RM120m for FY22. We opine that its focus on medical tourism would be a good way to boost revenue intensity, considering that foreign patients are generally charged 20% extra as compared to local patients (an industry-wide practice).

Disposal of non-core assets. KPJ has revealed its intentions to divest its non-core international operations, which includes Jeta Gardens (aged care facility in Australia) and its Indonesian operations. Currently the divestment of Indonesian operations is in the due diligence stage with several bidders and the disposal is expected to conclude by end-FY22. Disposal of Jeta Gardens is however, expected to take longer to conclude (about 24 months), due to the regulatory requirements. We gather that there are willing buyers in the market currently, as the aged care segment in Australia is now in a consolidation phase. Proceeds received from the disposal will likely be ploughed back to its existing operations.

Maximising utilisation. KPJ is also exploring the possibility of filling up idle capacities in its system – by allowing the public healthcare system and other healthcare providers to utilise its equipment for a fee. This could help to maximize the utilisation of its medical equipment, especially when it is not in use over the weekends. For starters, KPJ intends to roll out this initiative with its radiology department. While we do not expect this new strategy to create a strong boost to KPJ’s performance, we reckon that an additional revenue stream is still advantageous to the Group.

Forecast. Unchanged.

Maintain BUY, TP: RM1.13. We continue to like KPJ as we believe the Group is moving in the right direction with the initiatives it has in place and is bound to benefit from the recovery in both local and foreign patient volumes. Maintain BUY, with an unchanged SOP-derived TP of RM1.13.

Source: Hong Leong Investment Bank Research - 12 Aug 2022