Below are key takeaways from KPJ’s 1Q24 results briefing:

1Q24 Review

KPJ’s 1Q24 EBITDA increased 27% YoY to RM247mn, ahead of revenue growth of 11% YoY to RM908mn. 1Q24 bed occupancy rates decreased 5%- pts to 65% due to higher operational beds, which increased 8% to 3,693 beds. Meanwhile, inpatient volumes increased by 3% YoY but outpatient volumes decreased by 2% YoY. We note that this is encouraging, as the Puasa month was held in March (last year April). More importantly, the average revenue per inpatient and outpatient increased by 11% and 8% YoY to RM7,498 and RM304 respectively.

For 2Q24, we expect the patient volumes to improve, especially in the month of May/June while revenue per patient would remain resilient. As far as GP margin is concerned, we forecast it to improve to 44.3% in FY24 (vs. 42.9% in 1Q24) due to the competitive packages offered to nurses and significant repair and maintenance cost of hospitals in 1Q24.

Gestation Hospitals Progressing on Track

Management shared that Damansara Specialist Hospital 2 (DSH2), KPJ Batu Pahat, KPJ Dato’ Onn and KPJ Perlis achieved EBITDA positive in 1Q24. However, KPJ Miri is only expected to achieve EBITDA breakeven in 4Q24. Note that all 5 of these hospitals under the gestation period recorded RM137mn losses in FY23, with DSH2 the main culprit, contributing c. 58% of the losses.

We believe that KPJ Dato’ Onn, Batu Pahat and Perlis are on track to deliver their maiden profits in FY24. Coupled with the improving outlook of DSH2 (more than fivefold increased in inpatient and outpatient volumes in 1Q24 YoY), we expect KPJ to reduce the RM137mn losses by half in FY24. Note that DSH2’s operating beds will increase to 140 beds by end 2024 (vs. 99 beds currently).

Health Tourism, the Growth Driver

To recap, KPJ’s healthcare tourism revenue grew to RM190mn in FY23 (vs. RM134mn in FY22). In 1Q24, management shared that the health tourism contributed RM51mn (+19% YoY), representing 5.6% to KPJ’s revenue of RM908.0mn. KPJ plans to focus its resources in Indonesia and Bangladesh market. For instance, the group recently organised KPJ Jakarta Expo, a conversion-driven initiative to create awareness and a platform to showcase KPJ hospitals to Indonesia patients. Thus far, we gathered that the feedback has been positive with a slew of enquiries. Looking forward, KPJ would pursue events in cities across Indonesia including Surabaya, Bandung and Semarang.

Meanwhile, the group has forged a partnership with Marriott International to elevate the standard of care offered to patients, drawing on the expertise from the hospitality sector into healthcare services. In all, we expect KPJ’s healthcare tourism revenue to increase by 68% to RM324mn in FY24. The earnings growth would be fuelled by: i) collaboration with local agencies in Indonesia, ii) gaining market share from Singapore and iii) higher medical tourist arrivals with the visa-free entry decision, especially from China and India.

Impact

No Change to Earnings Forecasts.

Valuation

We reiterate our Hold recommendation on the stock with a TP of RM2.03/share based on SOTP valuation.

Source: TA Research - 29 May 2024