KPJ expects its earnings momentum to accelerate, underpinned by revenue intensity and rising demand in 2HFY24. Beyond CY24, it will add >1,500 beds (>+30%) over the next five years. It is optimistic for losses from KPJ’s five new hospitals to narrow substantially in CY24, driven by incremental revenues from higher patient throughput, new beds and improving operational efficiency. We maintain our forecasts, TP of RM1.95 and MARKET PERFORM call.

The key highlights from KPJ’s 2QFY24 post-results briefing are as follows:

1. KPJ expects sustained performance in 2HFY24 underpinned by revenue intensity and rising demand. Beyond CY24, it will add >1,500 beds (>+30%) bringing totalled beds to 5,000 over the next five years which we have already factored into our forecast. To recap, key operating indicators remained solid in 1HFY24. 1HFY24 earnings were driven by higher inpatient throughput (+9%), outpatient (+1%), bed capacity (+7%), surgeries (+5%) and average revenue per inpatient (+7%) and outpatient (+6%).
    
2. It is optimistic that the performance of its five new hospitals will further improve for the rest of FY24. We understand that losses in 1HFY24 at new hospitals have narrowed but the group stopped short of guiding. Recall, in 1QFY24 net losses of these hospitals narrowed by 30% YoY.
   
   With incremental revenues from higher patient throughput, Damansara Specialist Hospital 2 (DSH2), KPJ Perlis, KPJ Batu Pahat and KPJ Bandar Dato Onn already turned EBITDA-positive in 1HFY24, while KPJ Miri is expected to achieve the same in end- 2024. Note that Miri and DSH2 were EBITDA-negative in 4QFY23.
   
   Recall, KPJ is optimistic that losses of RM137m from these five new hospitals in FY23 will halve in FY24, which works out to be RM69m (or 25% of our FY24F net profit). It also expects its overall earnings to improve in 2HFY24 driven by better operational efficiency from its cost optimisation effort including having central procurement and overhead absorption by adding new beds (+7%), which we have factored into our forecasts.
    
3. Particularly, DSH2 continued to show improvement reporting a RM3.2m EBITDA in 2QFY24 compared to RM0.6m in 1QFY24. The group is hopeful with effective marketing and advanced technological equipment, DSH2 is capable of achieving double- digit topline growth in the next few quarters. It has conducted its first robotic surgery on partial nephrectomy. Presently, DSH2 registered average revenue of RM10m per month compared to RM4m per month las year. It is targeting DSH2 to register revenue of RM100m in FY24. The group aims to increase bed capacity from 120 beds in 2024 to 205-265 beds in 2025. Initially, DSH2 is targeting 50% medical tourism portion in FY24-FY25 by offering cardiac services through collaboration with consultants to bring in patients from the Middle East. KPJ’s 1HFY24 medical tourism revenue rose 20% YoY to RM106m and is targeted to reach RM200-300m in FY24 (5% to 8% of our FY24F revenue) where almost 50% of the patients are from Indonesia.

Forecasts. Maintained based on our unchanged assumptions that its FY24 patient throughput will grow at 9% (vs. an estimated 7% in FY23) with BOR at 72% (vs. 67% in FY23), driven by revenue intensity emanating from the recovery in demand for elective surgeries.

Valuations. We also keep our TP at RM1.95 based on 28x FY25F EPS, in line with its regional peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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, which mean players are 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, the fundamentals have priced-in the recent run-up in its share price. Reiterate MARKET PERFORM.

Key risks to our call are: (i) reputational risk, (ii) the lack of political will to roll out a national health insurance scheme, and (iii) longer-than-expected gestation periods for its new hospitals.

Source: Kenanga Research - 2 Sep 2024