KPJ expects the recovery in demand for its services to accelerate in the remaining quarters underpinned by pent-up demand for elective surgeries. Thanks to high patient throughput, two of its new hospitals have turned EBITDA-positive while the other two only recorded small operating losses. We maintain our forecasts, TP of RM1.50 and OUTPERFORM call.

We came away from KPJ’s 1QFY23 post-results briefing feeling positive. The key highlights are as follows:

1. KPJ expects the demand recovery for its services to accelerate in the remaining quarters underpinned by pent-up demand for elective surgeries with both local and foreign patients returning. The group indicated that its 1QFY is seasonally a slower quarter due to the festive holidays and a shortened February month. We highlight that historically (i.e. for past three years pre-COVID, 2H accounted for an average of between 53%-62% of full-year earnings). To recap, key operating indicators showed marked improvement in 1QFY23. YoY, 1QFY23 earnings were driven by higher patient throughput (+39%), bed occupancy rate (BOR) of 70% compared to 48% in 1QFY22 and health tourism revenue (+126%) as the group saw a rebound in non-COVID related services including elective surgeries (+23%).

2. Due to better operational efficiencies and overhead absorption rate as a result of gradual-ramp up in opening new beds and hence gaining incremental revenue underpinned by higher patient throughput, the group’s two hospitals under gestation turned EBITDA-positive. Its other hospitals, namely KPJ Perlis and KPJ Miri recorded small operating loss of RM0.2m in 1QFY23. The group expect all four hospitals to breakeven somewhere in 2023 as revenue is gaining momentum.

3. Damansara Specialist Hospital 2 (DSH2) posted 1QFY23 losses of RM22m, similar to 4QFY22. In 1QFY23, BOR came in at 34% compared to 38% in 4QFY22 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 medical 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 positioning DSH2 as KPJ Healthcare’s first smart hospital by taking the lead in digital transformation. Upon successful implementation, the digital transformation is expected to be replicated in the group’s other hospitals. Specifically, KPJ will implement a new Hospital Information System (nHIS), which is a platform that provides data-driven intelligence by utilising analytics and insight using a machine learning engine. At the heart of the system is AI-driven Electronic Medical Records System, coupled with an Internet of Things (IoT) network to enable seamless integration of processes, systems and experiences throughout the facility.

Outlook. Looking ahead into FY23, we project KPJ’s patient throughput to grow 14% (vs. 12% in FY22) and BOR of 70% (vs. 58% in FY22) as the demand for private healthcare services resumes its growth path post the pandemic.

Forecasts. We keep our earnings forecasts unchanged. Our TP remains at RM1.50 based on 28x FY24F EPS, in line with its regional peers. 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 - 1 Jun 2023