• The recovery in inpatient arrivals and occupancy rate has slowed while the resurgence of Covid-19 cases may affect 4Q20 operating performance.
• Following major changes in the Board of Directors and appointment of new MD, we expect KPJ to formulate a new growth / business plan. Moving ahead, we believe KPJ may favour growth projects with smaller capex / shorter gestation periods rather than building new hospitals.
• We revise our 2020/21/22E earnings projections by -4%/+4%/+4% after taking into consideration the slow recovery in inpatient arrivals and KPJ’s revised expansion schedule. Maintain HOLD with a revised PT of RM0.92.

Occupancy Rate Has Rebounded, But Still Tracks Below Expectations

After hitting a low of 27% in April 2020, KPJ’s bed occupancy rate has rebounded to 49% in Jul20, 52% in Aug20 and fluctuated between 50-57% in Sep20. The rate of recovery was a tad below management’s expectations. Moving into a seasonally stronger 4Q, management now project its average occupancy rate at low-60%, a downward revision from its earlier projection of high-60% / sub-70%.

KPJ may shift focus to expansions with lower capex / shorter gestation

We recently hosted a meeting with KPJ’s new President & MD, Mr Ahmad Shahizam and CFO, Puan Norhaizam. We sense that the management team plans to shift its growth focus from construction of new hospitals (high capex, long gestations) to other opportunities that require lower capex and shorter gestation periods such as expanding the capacity at its existing hospitals. Elsewhere, management is also looking at the opportunities in the non-hospital segments (ie, ambulatory care, pharmacies, senior & assisted living cares) and is evaluating its long-term strategy for its overseas portfolio. Broadly, we like management’s plan to slow down the building of new hospitals, in view of the high capex and strong competition.

Revising Earnings Forecasts, Maintain HOLD With a Higher PT of RM0.92

We revise our 2020-22E earnings forecasts by -4%/+4%/+4% respectively after incorporating lower inpatient arrivals / occupancy rate for 2020E but lowering our depreciation / finance costs and upfront start-up costs for 2021-22E to reflect KPJ’s latest expansion schedule. In tandem, we raise our SOTP-derived PT to RM0.92 (from RM0.90). Notwithstanding our earnings and PT upgrade, we maintain our HOLD rating on KPJ due to its lacklustre earnings growth trajectory and heavy balance sheet.

Source: Affin Hwang Research - 7 Oct 2020