FY23 Review

To recap, KPJ’s net profit rose 57% to RM281.3mn while revenue grew 19.2% to RM3.4bn in FY23. The lower effective tax rate of 20.7% (-6.8 pts YoY), strong demand and divestment of international businesses boosted FY23 performance. Operationally, FY23 bed occupancy rates increased to 67% (vs. 58% in FY22) as inpatients improved 19% YoY to 361.987 inpatients. As such, number of surgeries and deliveries improved by 11% and 2% to 105,807 and 13,495 respectively in FY23. Meanwhile, average revenue per inpatient and outpatient increased by 7% to RM7,014 and RM286 respectively.

Turnaround Gestation Hospitals

We gather that 5 hospitals (KPJ Miri, KPJ Perlis, Damansara Specialist Hospital 2 (DSH2), KPJ Batu Pahat and KPJ Dato’ Onn) under the gestation period recorded RM137mn losses in FY23. Most of the losses came from its new DSH2 (circa-RM80mn), as DSH2 opened only in end-2022.

Positively, management is optimistic that DSH2 will be EBITDA positive by end-2024, driven by: i) expansion (+30 beds to 120 beds), ii) insurance panels (secured GE and Prudential, AIA will begin on 22nd Feb), iii) health tourism and iv) recruitment of new consultants. In all, management targets to reduce the RM137mn losses by half in FY24 as KPJ Dato’ Onn, Batu Pahat and Perlis are on track to deliver their maiden profits.

2024 Growth Intact

KPJ’s President & Managing Director, Mr. Chin alluded that the group will focus on 4 strategic areas (business, process, people and sustainability). We believe that KPJ will post 11.2% profit growth in FY24 on the back of resilient demand and turnaround of hospitals under the gestation period. The number of deliveries is expected to increase due to the dragon year while the group will remain focus on improving operational efficiency and procurement optimisation. Overall, we expect FY24 GP margin to improve further to 44.3% (vs. 41.9% in FY23).

Meanwhile, management shared that CAPEX guidance for FY24 is at circaRM450mn, allocating 50% for growth initiatives, 34% to improve operations and 16% to IT. The group targets to raise the number of beds by approximately 368 new beds (mostly from KPJ Penang, KPJ Ampang, DSH2) to 4,101 in 2024. Meanwhile, the opening of KPJ Kuala Selangor (60 operating beds) will be by early 2025.

Separately, we understand that the disposal of KPJ Dhaka (Bangladesh) will likely be in 2024 as Bangladesh is no longer a part of KPJ’s strategy. Management added that contribution from KPJ Dhaka (profitable) is insignificant. As for its Vejthani hospital in Bangkok, there are no plans to dispose its 23% stake as the business is still viable.

Growing Health Tourism

Malaysia’s health tourism revenue is expected to surpass RM2bn (vs. RM1.3bn in 2022) mark in 2023. The Malaysia Healthcare Travel Council targets market growth of 18% and 20% in FY24 and FY25 respectively. For KPJ, healthcare tourism revenue stood at RM190mn (vs. RM134mn in FY22), accounting for 6% of KPJ’s revenue in FY23.

Moving forward, the group plans to raise market share to 20% (vs. 8.5% in FY23) within 2-3 years via: i) 13 rep offices in Indonesia, ii) full-fledge health tourism team, iii) double investment for promotion and iv) leverage on strategies on Mayo Clinic affiliation, robotic, heart & lungs and preterm delivery management. In addition, KPJ will focus on medical tourists from Vietnam, China and Middle East.

Impact

We raise our FY24/25 earnings estimates to RM312.8mn/RM322.5mn from RM247.7mn/253.7mn after imputing FY23 numbers, revising revenue per inpatient and number of inpatient higher by 2% and 4% respectively.

Valuation

Following the earnings revision, we increase our TP to RM1.75/share (previously RM1.50) based on SOTP valuation. Maintain Hold.

Source: TA Research - 21 Feb 2024