KPJ’s FY22 results beat expectations on stronger-than-expected business rebound as the pandemic ended. For FY23, we project its patient throughput to grow 14% (vs. 12% in FY22) and bed occupancy rate (BOR) of 66% (vs. 58% in FY22) as the private healthcare services market resumes its growth path post the pandemic. We raise our FY23F net profit by 10%, lift our TP by 13% to RM1.32 (from RM1.16) while reiterating our OUTPERFORM call.

FY22 net profit more than tripled to RM172m, beating our forecast and the consensus estimates by 9% and 19%, respectively. The variance against our forecast came largely from a stronger-than-expected rebound in inpatient throughput.

YoY, FY22 revenue rose 13%, thanks to higher patient throughput (+10%) and higher BOR of 58% (compared to 43% in FY21) as demand for non-COVID related services rebounded including elective surgeries following the transition to an endemic phase. Specifically, its Malaysia operation (which anchors >96% of earnings) registered a higher BOR of 58% against 43% in FY21 as surgeries rose 12%. Better overhead absorption (on an improved turnover) drove a 34% improvement in EBITDA which we believe was also boosted by narrowing losses from its new hospitals (which are EBITDA positive), i.e. KPJ Bandar Dato’ Onn, KPJ Perlis and KPJ Miri. As a result, FY22 net profit more than doubled, albeit from a low base a year ago.

QoQ, 4QFY22 revenue fell marginally by 4% due to lower throughput from inpatient (-3%), outpatient (-7%) and slightly lower bed occupancy rate (BOR) of 64% compared to 66% in 3QFY22. However, 4QFY22 net profit rose 33% to RM72m due to a lower effective tax rate of 16% (recognition of tax credits arising from the investment tax allowances) compared to 35% in 3QFY22. A 5th interim dividend of 0.6 sen was declared bringing FY22 DPS to 2.6 sen which came in above our expectation.

Outlook. Looking ahead into FY23, we project KPJ’s patient throughput to grow 14% (vs. 12% in FY22) and BOR of 66% (vs. 58% in FY22) as the demand for private healthcare services resumes its growth path post the pandemic.

Forecasts. We raise our FY23F net profit by 10% (as we raise our assumption on patient throughput from 12% to 14%). We also introduce our FY24F numbers.

We continue to like KPJ for: (i) the low “price elasticity of demand” for healthcare service, which mean players are less vulnerable to high inflation as they could pass on the higher cost, (ii) it being a reopening play, especially for elective surgeries, and (iii) its strong market position locally with the largest network of 29 private hospitals (vs. only 16 of IHH Healthcare’s Malaysia operation in the second place). We roll over our valuation base from FY23F to FY24F. Correspondingly, our TP is raised by 13% to RM1.32 (from RM1.16) based on PER of 27x FY24F EPS, at a 10% 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 - 20 Feb 2023