KPJ is optimistic that its five hospitals under gestation will halve their losses in FY24, driven by incremental revenues from higher patient throughput. It is also driving earnings growth by adding new beds and improving operational efficiencies. We maintain our forecasts, TP of RM1.95 and OUTPERFORM call.

We came away from KPJ’s 4QFY23 post-results briefing feeling positive. The key highlights are as follows:

1. KPJ expects sustained performance in 1QFY24 with no sign of patient throughput slowing down as patients are expected to flock back following the year-end holiday period in 4QFY23. Note that historically (i.e. for past three years pre-COVID, 2H accounted for an average of between 53%-62% of full-year earnings). To recap, key operating indicators remained solid in both FY23 and 4QFY23 despite the slower year-end holiday period that led to patients delaying treatment. FY23 earnings were driven by higher inpatient throughput (+19%), surgeries (+11%), average revenue per outpatient (+7%) and inpatient (+7%), bed occupancy rate (BOR) of 67% compared to 58% in FY22 and health tourism revenue (+42%). QoQ, 4QFY23 topline was marginally lower by 2% due to lower throughput from inpatient (-4%) and outpatient (-3%) mitigated by higher average revenue per outpatient (+2%).

2. KPJ is optimistic that its five hospitals under gestation with losses totalling RM137m in FY23 will be halved in FY24, which will work out to RM69m or 25% of our FY24F net profit. It expects earnings to gain momentum moving into FY24 on better operational efficiencies from its cost optimisation effort and overhead absorption by adding new beds (+10%), which we have factored into our forecasts. With incremental revenues from higher patient throughput, the group’s three hospitals, namely, KPJ Perlis, KPJ Bandar Dato Onn and KPJ Batu Pahat which were under gestation turned EBITDA-positive in FY23. The group expects these three hospitals to be profitable by end-FY24. Meanwhile, the other two new hospitals namely Miri and DSH2 will still be EBITDA-negative. The group expects Miri and DSH2 to be EBITDA-breakeven by end-FY24 as their revenues rise.

3. Its Damansara Specialist Hospital 2 (DSH2) posted RM80m losses in FY23 in its maiden operation in FY23. 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 FY23 medical tourism revenue rose 42% to RM190m and is targeted to reach RM300m-RM400m in FY24 (9-12% of our FY24F revenue) where almost 50% of the patients are from Indonesia.

4. Over the next two years, KPJ intends to increase its overall bed capacity by progressively adding 1,000 beds at its new hospitals and existing hospitals up to end-2025. Major increases to bed capacity will be made at KPJ Damansara 2 Specialist Hospital, KPJ Puteri Specialist Hospital, KPJ Ampang Specialist Hospital, KPJ Klang Specialist Hospital and KPJ Penang Specialist Hospital.

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 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 - 21 Feb 2024