KPJ’s 1HFY22 results disappointed as the rebound in patient throughput fell short of expectations. Its patient throughput will continue to normalise with the return of elective surgeries as the pandemic moves towards an end. However, KPJ’s new hospitals still under gestation period will continue to weigh down on overall earnings. We cut our FY22F net profit by 4% but maintain our TP of RM0.87 (which is based on FY23F earnings). Reiterate MARKET PERFORM.

1HFY22 net profit came in below expectations at only 41% each of our full-year forecast and the consensus full-year estimates. The variance against our forecast came largely from the weak rebound in inpatient throughput that fell short of expectations. YoY, 1HFY22 revenue rose 10%, thanks to higher patient throughput (+10%) and higher bed occupancy rate (BOR) (of 51% compared to 40% in 1HFY21) as the group saw a rebound in non-COVID related services including elective surgeries following the transition to an endemic phase. Specifically, operations in Malaysia (which anchors >96% of earnings) registered a higher BOR of 52% against 41% in 1HFY21 as surgeries rose 12%. Pent-up demand at its Indonesian operation boosted patient visits (+76%) and surgeries (+84%). Better overhead absorption (on an improved turnover) drove a 28% improvement in EBITDA despite dilution from new hospitals under gestation period (which registered operating losses), i.e. KPJ Bandar Dato’ Onn, KPJ Perlis and KPJ Miri. 1HFY22 net profit more than doubled from a low base a year ago.

Outlook. Its patient throughput will continue to normalise with the return of elective surgeries as the pandemic moves towards an end. However, this may not buoy the bottomline due to its high cost structure, including lumpy pre-operating expenses at Phase 2 of KPJ Damansara Specialist Hospital which will commence operations end-3QFY22. Meanwhile, other new hospitals will continue to weigh down on its overall earnings.

Forecasts. We cut our FY22F net profit by 4% (as we lower our assumption on patient throughput) but maintain our FY23F numbers. We keep our TP of RM0.87 based on 25x FY23F EPS, at a 20% discount to the average of its regional peers to reflect KPJ’s smaller market capitalisation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 2).

Key risks to our call are: (i) regulatory risk, (ii) the lack of political will to roll out a national health insurance scheme, and (iii) longer-than-expected gestation periods for its newer hospitals.

Source: Kenanga Research - 30 Aug 2022