Below are key takeaways from KPJ’s 2Q23 results briefing:

Review of 2Q23

KPJ 2Q23 revenue and net profit declined by 3.6% and 9.5% QoQ to RM799.5mn and RM46.9mn respectively. The weaker performance was not a surprise mainly due to the fasting month in April, which led to a lower bed occupancy rate (BOR) of 63% (vs. 70% in 1Q23).

Positively, YoY financial performance continued to improve on the back of resurgence in healthcare services. 2Q23 PBT increased 48.4% to RM68.5mn driven by: i) higher inpatients admission of 14% to 82,479, ii) higher average revenue per inpatient of 5% to RM6,982, iii) 7% growth in number of surgeries and iv) 12% increase in number of deliveries.

Separately, we gather that 3 of KPJ hospitals (DSH2, KPJ Miri and KPJ Perlis) are still at an EBITDA loss (RM18mn in 1H23). Coupled with KPJ Batu Pahat and KPJ Dato’ Onn, the 5 hospital recorded a total of RM55mn loss before tax as at 1H23.

Expansion of DSH2 on Track

Management will continue to focus on Damansara Specialist Hospital 2 (DSH2). We understand that DSH2 average inpatients and outpatient numbers stood at 255 and 2,859 per month in 2Q23 respectively. Given that DSH2 average BOR is at 56% (weekdays as high as 98%), the group will expand DSH2 bed capacity to 123 beds from 60 beds currently by September 2023. In all, we believe that DSH2 revenue contribution will remain at circa-RM5mn per month in 3Q23, before improving to RM7mn per month in 4Q23. More importantly, DSH2 is on-track to achieve EBITDA breakeven by end-2024.

Growing Health Tourism

Health tourism contributed RM87.5mn to KPJ’s 1H23 revenue as compared to RM50.1mn in 1H22. Management foresee that medical tourism revenue contribution will increase to RM200mn and RM400mn in FY23 and FY24 respectively. Besides Indonesia market (49% of medical tourist contribution), KPJ plans to capture Vietnam and Cambodia markets. As for the Middle-East market, the group will aim for corporates (business to-business) and insurance companies, especially in Kuwait and Qatar.

Overall, we are upbeat on KPJ’s strategy to further grow its medical tourism, given the higher contribution and margins. Note that medical tourist charges/fees are more expensive (at least 20% mark-up) than local patients.

2H23 will be Better

We are sanguine that KPJ will maintain its earnings momentum for the upcoming quarters. Backed by improving demand for quality healthcare services, KPJ targets to increase bed capacity by about 150 beds in 2H23 as weekdays BOR is close to 95% at some of its hospitals. Moreover, the higher patient volumes in 3Q23, expansion of services range and recruitment of more consultants will bode well to KPJ’s prospects.

In our forecast, we expect FY23 EBITDA margin to improve to 24.3% (vs. 23.3% in 1H23 and 22.8% in FY22) while earnings will grow by 31% to RM225.3mn.

Impact

Maintain earnings forecasts.

Valuation

We reiterate our Buy recommendation and TP at RM1.32/share based on SOTP valuation.

Source: TA Research - 1 Sept 2023