We maintain our SELL rating on KPJ Healthcare (KPJ) with an unchanged SOTP-derived price target of RM0.80. The Covid-19 pandemic and MCO should have a material impact to KPJ’s 2020E EPS but the consensus estimates have yet to fully priced in the negatives, we believe. Moving into 2021E, a normalisation in patient arrivals should drive revenue recovery but its profitability may be affected by high upfront costs for new hospitals. At 26x 2021E PER, valuation is in line with its 9-year average PER and looks stretched to us, considering the difficult market conditions and weak earnings outlook.

Covid-19 and MCO Have Major Implications to KPJ’s Operations

KPJ is experiencing a sharp decline in its inpatient arrivals and occupancy rate due to: (i) scale down in business operations whereby KPJ defers the elective procedures and appointments to reduce traffic into its hospitals; (ii) cautious sentiment (Covid-19 and weak economy outlook); and (iii) the Movement Control Order (MCO) that affects medical tourism and discourages the patients to travel inter-state for medical treatments. KPJ guided that its hospitals’ occupancy rate has halved (dipping below 30%) in the recent weeks. Elsewhere, the MCO has also led to temporary suspension on all of its expansion projects.

Earnings May Decline Sharply in 2020E

We had in March 2020 slashed our 2020-22E earnings assumptions by 24-30% in anticipation of a sharp decline in KPJ’s revenue due to the Covid-19 pandemic and MCO. Broadly, we expect KPJ to see a sharp 36% yoy earnings contraction in its 2020E before recovering by 6% in 2021E, supported by a normalisation in patient arrivals. However, the earnings recovery may be weighed down by a weak revenue per patient (due to challenging domestic economic condition), high upfront costs (depreciation, personnel costs) for new hospitals and high staff costs.

Maintain SELL With An Unchanged Price Target of RM0.80

Maintain SELL. We believe that the market has yet to fully price in the negative earnings impact from Covid-19 and MCO. Looking ahead, we expect disappointments in its quarterly earnings and consensus earnings cuts to de-rate KPJ’s share price. At 26x 2020E PER, valuation looks stretched to us, considering the difficult market conditions and its weak earnings outlook. This note marks a transfer of coverage.

Source: Affin Hwang Research - 21 Apr 2020