KPJ’s 1QFY24 results met expectations. Its 1QFY24 core net profit grew 5% YoY on higher inpatient throughput partially offset by, we believe, cost pressure especially at its newer hospitals. We keep our forecasts and TP of RM1.95 but downgrade our call to MARKET PERFORM from OUTPERFORM after the recent run-up in its share price.

Its 1QFY24 core net profit of RM57.1m (excluding extinguishment of net liabilities related to the disposal of the aged care business by Jeta Gardens) came in at only 21% and 19% of our full-year forecast and the full-year consensus estimate, respectively. We consider the results within expectations as KPJ typically reports stronger earnings in 2H. It declared an interim dividend of 1 sen, on track to meet our full-year forecast of 3.35 sen.

YoY, its 1QFY24 revenue rose 11% thanks to higher inpatient throughput (+4%) and bed capacity (+8%) which drove elective surgeries cases (+13%). However, its EBITDA only rose 5% weighed down by, we believe, cost pressure especially at newer hospitals, i.e. DSH2, KPJ Bandar Dato’ Onn, KPJ Perlis and KPJ Miri. Similarly, its core net profit only grew 5%.

QoQ, its 1QFY24 revenue was flattish on lower throughput from both inpatients (-4%) and outpatients (-6%). However, its 1QFY24 core net fell 32% due to a high base in the preceding quarter (arising from tax write-back due to recognition of unutilised capital allowances and tax losses for new businesses under gestation).

Outlook. We expect KPJ’s patient throughput to grow at 9% in FY24 (vs. an estimated 7% in FY23) with a bed occupancy rate (BOR) of 72% (vs. 67% in FY23) driven by improved revenue intensity emanating from the recovery in 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.

Forecasts. Maintained.

Valuations. We keep our TP of RM1.95 based on 28x FY25F 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).

Investment case. We 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 making players 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). However, we downgrade our call to MARKET PERFORM from OUTPERFORM after the recent run-up in its share price.

Key risks to our call are: (i) regulatory risks, (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 - 28 May 2024