KPJ’s 1HFY23 came in within expectations. Its 1HFY23 net profit doubled, buoyed by the full economy reopening coupled with reduced losses from new hospitals. It is on track to meet our FY23F patient throughput growth of 14% (vs. 12% in FY22) and bed occupancy rate (BOR) of 70% (vs. 58% in FY22). We keep our earnings forecasts, TP of RM1.50 and OUTPERFORM call.

Its 1HFY23 net profit came in at only 45% and 43% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectations as its 2H is typically stronger, accounting for between 53%-60% of the full-year earnings historically.

YoY, its 1HFY23 revenue rose 21%, thanks to higher patient throughput (+25%) and higher BOR of 66% (compared to 52% in 1HFY22) as demand for non-COVID related services rebounded including elective surgeries cases (+15%) following the transition to endemic phase. However, its net profit doubled thanks to better overhead absorption (on an improved turnover) as well as reduced losses from its new hospitals (which are EBITDA positive), i.e. KPJ Bandar Dato’ Onn, KPJ Perlis and KPJ Miri.

QoQ, its 2QFY23 revenue fell 4% due to lower throughput from inpatient (-7%) and outpatient (-7%) as BOR tapered off to 63% compared to 70% in 1QFY23. We believe this was due to less patients seeking treatment during the festive month. Correspondingly, its 2QFY23 net profit fell 10% to RM47m due to a higher effective tax rate of 29% compared to 27% in 1QFY23. A 3rd interim dividend of 0.8 sen was declared bringing 1HFY23 to 2.05 sen which came in within our expectation.

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. Maintained.

We keep our TP of RM1.50 based on 28x FY24F EPS, in line with its regional peers. There is no adjustment to TP based on ESG given a 3- star rating as appraised by us (see next page).

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) 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). Reiterate OUTPERFORM.

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 2023