Citing improved cost efficiency, KPJ guided for a PBT margin of 12% (vs. 9% in FY22) for FY23. Accordingly, we raised our PBT margin assumption to 12% (from 9%). Meanwhile, its private healthcare services have resumed their demand growth path after being interrupted by the pandemic. Hence, we raise our FY23-24F net profit by 8-9%, our TP by 13% to RM1.50 (from RM1.32) and reiterate our OUTPERFORM call.

We came away from KPJ’s 4QFY22 post-results briefing feeling positive. The key highlights are as follows:

1. KPJ expects the demand recovery for its services to extend into the coming quarters. There has been a strong return of domestic patients as well as foreign patients. To recap, key operating indicators showed mark improvement in both FY22 and 4QFY22. FY22 earnings were driven by higher patient throughput (+10%), bed occupancy rate (BOR) of 58% compared to 43% in FY21 and health tourism revenue (+63%) as the group saw a rebound in non COVID related services including elective surgeries. QoQ, 4QFY22 key operating indicators were seasonally lower across the board due to year-end public holidays including BOR (64% vs. 66% in 3QFY22), number of surgeries (-4%), inpatients (-3%) and outpatients (-7%).

2. The group is targeting FY23 PBT margin of 12% compared to 9% in FY22 (12% in 4QFY22) vs. our FY23 assumption of 9%. Due to better operational efficiencies and overhead absorption rate as a result of gradual-ramp up in opening new beds and hence incremental revenue underpinned by higher patient throughput, the group’s two hospitals under gestation turned EBITDA-positive and two other hospitals namely KPJ Perlis and KPJ Miri recorded a small EBITDA loss of RM3m in FY22.

3. Damansara Specialist Hospital 2 (DSH2)’s 4QFY22 losses narrowed compared to 3QFY22. In 4QFY22, BOR improved slightly to 38% compared to 27% in 3QFY22 on gradual ramp-up in activities. The group aims to increase bed capacity from 60-123 beds in 2023 to 205-265 beds in 2025. Initially, DSH2 is targeting 30% medical tourism in FY23 (thereafter 50% in 2025) by offering cardiac services through collaboration with consultants to bring in patients from the Middle East. Recall, the group is targeting DSH2 to be EBITDA-positive within three years by deploying 50% of capacity towards health tourism coupled with offering high revenue intensity services to reduce the gestation period including elective surgeries like neurosurgery, cardiac surgery, gastroenterology & endoscopy procedures and orthopaedics.

4. The group is looking to divest its entire 100% stake in PT Al-Aqar Permata Hijau and 80% interest in PT Khidmat Perawatan Jasa Medika for RM25.7m and expect a slight profit. The divestment is expected to be completed by June 2023. We are positive on this divestment which is in tandem with the group’s strategy to review its operations and investments in Indonesia which has been a drag to earnings over the past few years. Note that its Indonesia operation FY22 losses widened to RM7.7m compared to loss of RM6.7m in FY21.

Forecasts. 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. We raise our FY23-24F net profit by 8-9% as we assumed higher PBT margin from 9-11% to 10-12%.

We raised our TP by 13% to RM1.50 (from RM1.32) based on 28x FY24F EPS (previously 27x), in line with its regional peers. We remove the discount in PER valuation to regional peers to reflect KPJ’s improving earnings prospects. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Reiterate OUTPERFORM.

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).

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 - 21 Feb 2023