There is no sign of patient throughput slowing down at KPJ’s hospitals, paving the way for strong numbers ahead supported by higher-than-expected throughput numbers. Its performance will also be boosted by better operational efficiency and cost optimisation amidst a gradual ramp-up in new beds. We raise our FY24F and FY25F net profits by 5% and 8%, respectively, lift our TP by 8% to RM2.11 (from RM1.95) and reiterate MARKET PERFORM call.

Expecting a solid 2HFY24. Our recent channel checks point to no sign of patient throughput slowing down at KPJ’s hospitals (despite the tapering off of pent-up demand for elective surgeries post the pandemic), which has sustained longer than our expectation, paving the way for KPJ to perform beyond our earlier assumptions for 2HFY24. This led us to revise upwards our throughput assumptions. There could also be potential boost from a lower effective tax rate, as it typically utilises its tax benefits arising from unutilised capital allowances, tax losses for new businesses under gestation and recognition of tax allowances in 4Q. Coupled with 2H typically being stronger than 1H, our FY24F net profit of RM273m (before our upgrade) appeared to be conservative.

FY25 earnings to be driven by organic growth and operational efficiencies. Beyond CY24, it will add >1,500 beds (>+30%) bringing total beds to 5,000 over the next five years which we have already factored into our forecasts. In terms of bottom-line profitability, we expect earnings to gain momentum moving into FY25 on better operational efficiencies from its cost optimisation effort and overhead absorption rate as a result of a gradual ramp-up in opening new beds (+7%). With incremental revenues from higher patient throughput, Damansara Specialist Hospital 2 (DSH2), KPJ Perlis, KPJ Batu Pahat and KPJ Bandar Dato Onn have 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).

Particularly, DSH2 continued to show improvement, reporting RM3.2m EBITDA in 2QFY24 compared to RM0.6m in 1QFY24. The group is hopeful that 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 last 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.

Forecasts. We raise our FY24-25F net profit by 5-8%, respectively, as we lift our patient throughput assumptions to 10% each (from 9%).

Valuations. Consequently, we raise our TP by 8% to RM2.11 (from RM1.95) based on unchanged 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).

Outlook. In FY24, we expect KPJ’s patient throughput to grow 10% (vs. an estimated 7% in FY23) with BOR at 72% (vs. an estimated 69% in 2023) driven by revenue intensity emanating from the recovery in demand for elective surgeries.

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, 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 been priced-in by 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 - 24 Sep 2024