KPJ expects sustained performance in 4QFY23 with no sign of patient throughput slowing down. Thanks to high patient throughput, two of its new hospitals have turned EBITDA-positive while the other three only recorded small operating losses. We maintain our forecasts, TP of RM1.56 and OUTPERFORM call.

We came away from KPJ’s 3QFY23 post-results briefing feeling positive. The key highlights are as follows:

1. KPJ expects sustained performance in 4QFY23 with no sign of patient throughput slowing down. To recap, key operating indicators showed marked improvement in 3QFY23. QoQ, 3QFY23 earnings were driven by higher throughput from inpatient (+17%) and outpatient (+11%) as BOR rose to 73% from 63% in 2QFY23 as patients flocked back to seek treatment following the festive holidays in 2QFY23.

2. The group expects earnings to gain momentum moving into FY24 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 (+9%) which we have factored into our forecast. Hence, having gained incremental revenue underpinned by higher patient throughput, the group’s two hospitals under gestation have turned EBITDA-positive. Only three hospitals namely Miri, Perlis and DSH2 still recorded losses. The group expect Miri, Perlis and DSH2 to be EBITDA-breakeven by end-2024 as their revenues are gaining momentum. Over the longer-term, the group is targeting an EBITDA margin of 28% compared to our FY23-FY24F forecast of 23%.

3. Its Damansara Specialist Hospital 2 (DSH2) posted 9MFY23 losses of RM89m or 3QFY23 losses of RM19m vs. 2QFY23 losses of RM24m. The group aims to increase bed capacity from 60-123 beds in 2023 to 205-265 beds in 2025. Initially, DSH2 is targeting 30% medical tourism portion in FY23 (thereafter 50% in 2025) by offering cardiac services through collaboration with consultants to bring in patients from the Middle East. KPJ’s 1HFY23 medical tourism revenue rose 50% to RM100m and is targeted to reach RM200m in FY23 (6% of our FY23F revenue) where almost 50% of the patients are from Indonesia. Thereafter, it is targeting to achieve RM300m-RM400m in FY24 which accounts for 9%-12% of our FY24F revenue vs. the historical 2%-4%.

4. The group continues to remain focused on its non-core divestment in-line with its rationalisation strategy to improve profitability. Following the divestment of its Indonesian operations, we believe it is looking to divest Jeta Garden (aged care and retirement village business in Australia). Ceteris paribus, the divestment is expected to narrow losses and boost the group’s overall bottom line.

Outlook. We project KPJ’s patient throughput to grow 14% in FY23 (vs. 12% in FY22), and BOR of 71% (vs. 58% in FY22) as the demand for private healthcare services resumes its growth path post the pandemic. Additionally, we believe 4QFY23 could potentially be boosted by a lower effective tax rate. Recall, the group, typically utilised its tax benefits arising from unutilised capital allowances and tax losses for new businesses under gestation and recognition of tax allowances in 4Q.

Forecasts. Maintained.

We also keep our TP at RM1.56 based on 28x FY24F 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).

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). Reiterate OUTPERFORM.

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 - 30 Nov 2023