Losses from KPJ’s five new hospitals narrowed 30% YoY in 1QFY24. It is optimistic that these hospitals will halve their losses in FY24, driven by incremental revenues from higher patient throughput. KPJ’s earnings will also be driven by new beds and improving operational efficiency. We maintain our forecasts, TP of RM1.95 and MARKET PERFORM call.

We came away from KPJ’s 1QFY24 post-results briefing feeling positive. The key highlights are as follows:

1. KPJ expects sustained performance throughput the remaining of FY24 with no sign of patient throughput slowing down as patients are expected to flock back following the festive period in 1QFY24. Note that historically (i.e. for past three years pre-COVID, 2H accounted for an average of between 53%-65% of full-year earnings). To recap, key operating indicators remained solid in both 1QFY24 despite the slower festive period that led to patients delaying treatment. 1QFY24 earnings were driven by higher inpatient throughput (+4%), bed capacity (+8%), average revenue per inpatient (+11%) and outpatient (+8%) and surgeries (+1%) despite a lower bed occupancy rate (BOR) of 65% compared to 70% in 1QFY23 and outpatient throughput (-2%).

2. It is optimistic that the performance of its five new hospitals will further improve for the rest of FY24. As an indication, 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 1QFY24, while KPJ Miri is expected to achieve EBITDA-positive in end-2024. Note that Miri and DSH2 were EBITDA-negative in 4QFY23.

All in, KPJ is optimistic that losses of RM137m from these five new hospitals in FY23 will halve in FY24, which works out to be RM69m. It also expects its overall earnings to improve in subsequent quarters in FY24 driven by better operational efficiency from its cost optimisation effort and overhead absorption by adding new beds (+10%), which we have factored into our forecasts.

3. Particularly, DSH2 reported RM0.6m EBITDA in 1QFY24, from RM10m loss before interest, tax, depreciation and amortisation in 1QFY23. 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. 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 1QFY24 medical tourism revenue rose 21% YoY to RM51m and is targeted to reach RM300m in FY24 (9% 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 - 29 May 2024