KPJ expects its earnings momentum to accelerate during 2HCY23, 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 three only recorded small operating losses.

We maintain our forecasts, TP of RM1.50 and OUTPERFORM call. We came away from KPJ’s 2QFY23 post-results briefing feeling positive. The key highlights are as follows:

1. The group explained that the sequential weakness in 2QFY23 was due to less patients seeking treatment during the festive month. Recall, QoQ, its 2QFY23 topline fell 4% due to lower throughput from inpatient (-7%) and outpatient (-7%) as BOR tapered off to 63% compared to 70% in 1QFY23. Correspondingly, its 2QFY23 net profit fell 10% to RM47m. 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 1HFY23. YoY, 1HFY23 earnings were driven by 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.

2. The group expects earnings to gain momentum in 2HFY23 on better operational efficiencies from its cost optimisation effort and overhead absorption rate as a result of gradual-ramp up in opening new beds. Hence, having gained incremental revenue underpinned by higher patient throughput, the group’s two hospitals under gestation turned EBITDA-positive. Only three hospitals namely Miri, Perlis and DSH2 recorded losses of RM18m at EBITDA level. The group expect Miri and Perlis to be EBITDA-breakeven by end2023 as revenue is gaining momentum.

3. Its Damansara Specialist Hospital 2 (DSH2) posted 1HFY23 losses of RM46m or 2QFY23 losses of RM24m vs 1QFY23 of RM22m. In 2QFY23, BOR averaged 41% compared to 34% in 1QFY23 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 portion in FY23 (thereafter 50% in 2025) by offering cardiac services through collaboration with consultants to bring in patients from the Middle East. KPJ’s 1HFY23 medical tourism revenue rose 50% to RM100m and targeted to reach RM200m in FY23 (6% of our FY23F revenue) where almost 50% of the patients are from Indonesia. Thereafter, it is targeting to achieve RM400m in FY24 which accounts for 12% of our FY24F revenue vs the historical 2%- 4%.

Outlook. We project KPJ’s patient throughput to grow 14% in FY23 (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 also keep our TP 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).

We continue to like KPJ for: (i) the bright prospects of the private healthcare sector in Malaysia underpinned by rising affluence and ageing population, (ii) 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, 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) reputational risk, (ii) the lack of political will to roll out a national health insurance scheme, and (iii) longer-than-expected gestation periods for its new hospitals.

Source: Kenanga Research - 1 Sept 2023