Citing incremental revenue from higher patient throughput and improving operational efficiency, KPJ highlighted that 9MFY24 losses at its new hospitals under gestation declined by >50% which came in above our forecasts. Accordingly, we raised our FY24-26F net profit by 2-3%. Consequently, we raise our TP to RM2.40 (previously RM2.33) and reiterate our MARKET PERFORM call.

The key highlights from KPJ's 3QFY24 post-results briefing are as follows:

1. It is optimistic that the performance of its five new hospitals will further improve for the rest of FY24. We understand that losses in 9MFY24 at its new hospitals have narrowed by >50% YoY which is above our expectation. KPJ expects sustained performance in 4QCY24, underpinned by revenue intensity and rising demand. To recap, key operating indicators remained solid in 9MFY24. 9MFY24 earnings were driven by higher inpatient throughput (+8%), outpatient (+1%), bed capacity (+7%), surgeries (+5%) and average revenue per inpatient (+6%) and outpatient (+6%).
2. FY25 earnings to be driven by organic growth and operational efficiencies. It is optimistic of a total 4,100 beds (+13% YoY) by end-CY24. 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 revenue 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 9MFY24 except for Miri which we expect to achieve the same in CY25.
3. 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's bed capacity is 120 beds, to be increased 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 9MFY24 medical tourism revenue rose 22% YoY to RM168m and is targeted to reach RM200m-RM250m in FY24 (5%-7% of our FY24F revenue) where almost 50% of the patients are from Indonesia.

Valuations. We raise our FY24-26F net profit by 2%-3% to factor in lower losses from hospitals under gestation. Consequently, we raise our TP by 3% to RM2.40 based on unchanged 28x FY26F 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 are 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 - 27 Nov 2024