KPJ Healthcare - Superb End to FY23, Bright FY24 Awaits

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KPJ’s FY23 results beat expectations on a strong rebound in business and positive tax adjustments in 4Q. Its FY23 net profit rose 43%, driven by economy reopening and a lower tax. We raise our FY24-25F net profit forecasts by 6% and 5%, respectively, lift our TP by 5% to RM1.95 (from RM1.86) and reiterate our OUTPERFORM call.'

Its FY23 core net profit rose 43% to RM255m, beating our forecast and consensus estimates by 7% and 9%, respectively. The variance against our forecast came from a stronger-than-expected rebound in business as the pandemic came to a close and lower-than-expected effective tax rate arising from recognition of unutilised capital allowances and tax losses for new businesses under gestation.

YoY, its FY23 revenue rose 19%, thanks to higher inpatient throughput (+18%) and higher BOR of 67% (compared to 58% in FY22) as demand for non-COVID related services rebounded including elective surgeries cases (+11%) following the transition to endemic phase. However, its net profit rose 43% thanks to better overhead absorption (on an improved turnover) as well as reduced losses from its new hospitals (which are EBITDA positive), i.e. KPJ Bandar Dato’ Onn, KPJ Perlis and KPJ Miri.

QoQ, its 4QFY23 revenue fell 2% due to lower throughput from inpatient (-4%) and outpatient (-3%). However, its 4QFY23 core net profit rose 24% to RM84m boosted by a positive tax writeback (recognition of unutilised capital allowances and tax losses for new businesses under gestation) compared to 27% in 3QFY23. An interim dividend of 1.0 sen brought FY23 to 4.35 sen which was above our expectation.

Outlook. In FY24, we expect KPJ’s patient throughput to grow at 9% (vs. an estimated 7% in FY23) with BOR at 72% (vs. 67% in 2023) driven by 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. We raise our FY24-25F net profit forecasts by 6% and 5%, respectively, as we assumed a lower effective tax rate of 28% compared to 33% and higher bed-occupancy rate of 72% compared to 71%.

Valuations. Correspondingly, we lift our TP by 5% to RM1.95 (previously RM1.86) 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 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 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). Reiterate OUTPERFORM.

Key risks to our call are: (i) regulatory risk, (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 - 19 Feb 2024

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