There is no sign of patient throughput slowing down at KPJ’s hospitals, paving the way for strong numbers ahead. Its performance will also be boosted by better operational efficiency and cost optimisation amidst a gradual ramp-up in new beds. We raise our FY23-24F net profit forecasts by 5% each, lift our TP by 19% to RM1.86 (from RM1.56) and reiterate our OUTPERFORM call.

Expect a solid 4QFY23. 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), paving the way for a strong performance in 4QFY23 (which could also be potentially boosted by a lower effective tax rate, as it typically utilises its tax benefits arising from unutilised capital allowances and tax losses for new businesses under gestation and recognition of tax allowances in 4Q). Coupled with 4Q typically being KPJ’s strongest quarter, our FY23F net profit of RM228m (before our upgrade) appears to be conservative.

We now expect its 4QFY23F net profit to come in at RM75m (+11% QoQ; +4% YoY) driven by higher bed occupancy and inpatient throughput underpinned by sustained pent-up demand for elective surgeries, which will take its FY23 core net profit to a higher level of RM239m.

To recap, key operating indicators continued to show 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.

FY24 earnings to be driven by organic growth and operational efficiencies. In terms of bottom-line profitability, we expect 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 are still recording 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%. We believe management is focused and committed towards bottomline profitability following the divestment of its lossmaking Indonesian operations and Jeta Garden (aged care and retirement village business in Australia).

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. DSH2 is targeting 30%-50% medical tourism portion in FY24-FY25 by offering cardiac services through collaboration with consultants to bring in patients from the Middle East. KPJ is targeting to achieve RM300m-RM400m medical tourism revenue in FY24 which accounts for 9%-12% of our FY24F revenue vs. the historical 2%-4%.

Forecasts. We raise our FY23-24F net profit forecasts by 5% each as we lift our patient throughput assumptions to 7% and 9% (from from 6% and 8%), and introduce our FY25F numbers.

Outlook. In FY24, we expect KPJ’s patient throughput to grow at 9% (vs. an estimated 7% in FY23) with BOR at 71% (vs. an estimated 68% 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.

Valuations. Consequently, we raise our TP by 19% to RM1.86 (from RM1.56), also to reflect the rolling forward of our valuation base year to FY25F (from FY24F). The basis of our TP is 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 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 - 24 Jan 2024