Research houses have an upbeat outlook towards KPJ Healthcare based on the group’s 4Q23 results.
RHB Investment Bank Bhd (RHB) in its Malaysia Company Update today (Feb 21) said the stock is set to see margins grow, underpinned by various key strategic initiatives: Central procurement, its new Hospital Information System (nHIS), and the gradual expansion towards health tourism. Our TP implies 13x 2024F EV/EBITDA, at +1SD from the 5-year historical EV/EBITDA average of 12x, and has a 0% ESG premium or discount factored in.
RHB maintains a BUY call with its DCF-based TP of MYR1.86, 15% upside.
KPJ’s growth will be cemented on key strategic initiatives such as central procurement and a digital transformation plan. On the latter, the current nHIS project deployed at Damansara Specialist Hospital (DSH) 2 is under review as the group prepares to fully roll this out across its hospital network.
For this, KPJ has set aside MYR450m in capex for 2024, with >50% of this allocated for growth-driven initiatives (eg adding 350 new beds, with KPJ Kuala Selangor expected to open its doors in late 2024 or 1Q25).
The recent collaboration between DSH and DSH2 with Mayo Clinic – a non-profit US academic medical centre – should elevate KPJ’s patient experience, while solidifying DSH2’s position as a centre of excellence.
Hospitals under a gestation period
Five of its hospitals under a gestation period reported a combined PBT loss of MYR137m in 2023 (DSH2: c.MYR80m loss).
DSH2’s full-year EBITDA loss was MYR23m vs MYR20m in 9M23, indicating a narrower EBITDA loss on a monthly average basis. Management indicated that DSH2’s monthly revenue grew by 20% MoM in January.
Moving forward, it will emphasise on identifying various growth drivers for DSH2 (ie insurance empanelment, installation of robotic surgery, expanding the health tourism (HT) portion).
KPJ closed 2023 with a historical high HT revenue of MYR190m (+42% YoY), which accounted for 6% of group revenue (2019: 5%).
As KPJ is the largest private healthcare service provider (by number of beds) in Malaysia, its management has set an ambitious target of achieving an 18-20% market share by 2024-2025 vs 6% currently.
Revisions to RHB’s forecasts
RHB maintains their earnings estimates. RHB’s unchanged TP of MYR1.86 implies 13x EV/EBITDA, or +1SD from its 5-year historical average of 12x. 13x EV/EBITDA is on par with IHH Healthcare’s (IHHMK,BUY, TP:MYR6.90)EV/EBITDA for the past two years (IHH’s 5-year EV/EBITDA average is 16x).
RHB still likes KPJ for its key strategic direction for the road ahead, its encouraging growth in the health tourism segment, its digital transformation plan which could offer room for further margin growth, as well as the gradual improvement in its operating efficiency with hospitals currently under a gestation being expected to start contributing meaningfully to group numbers by 2024.
Downside risks include lower-than-expected patient visits and higher-than-expected operating costs, RHB said.
Kenanga Investment Bank Berhad (Kenanga) cited that 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. Kenanga maintains their forecasts, TP of RM1.95 and OUTPERFORM call, it said in a note today.
Kenanga 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 Kenanga has factored into their 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
Kenanga maintained their forecasts based on their 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
Kenanga also keeps to their 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 them.
Investment case
Kenanga continues 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 Kenanga’s 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.
Optimism from post-results
CGSCIMB said KPJ Healthcare’s administrative expenses saw a 25.8% yoy/6.0% qoq increase to RM275.3m in 4Q23. Management shared during its analyst briefing that the noticeable increase included the RM6.8m impairment loss on its fixed assets, on top of higher utilities cost and staff costs.
Management also shared that the hiring environment for nurses is challenging as KPJ looks to hire ahead of its plans to expand bed capacity, from 3,733 beds as of end-FY23 to 4,101 in FY24F.
According to management, most of the 368 new beds that KPJ is looking to add in FY24F would be within profitable hospitals, which would support margins resilience due to the visibility of demand within these hospitals. The exception is for Damansara Specialist Hospital 2 (Damansara 2), which is looking to add c.30-50 beds in FY24F, as it is still in its gestational phase in its second year of operations, CGSCIMB said in its Company Flash Note today.
Management shared that its five loss-making hospitals (i.e. Damansara 2, Bandar Dato’ Onn, Perlis, Miri and Batu Pahat) had incurred c.RM137m in EBITDA losses for FY23, with 50-60% contributed by Damansara 2 itself.
The management is targeting to reduce EBITDA losses arising from these gestational losses by more than 50% in FY24F.
KPJ is also looking to open its new hospital in Kuala Selangor by late-2024F/early2025F, which would have 60 operating beds at the start. Working towards an aspirational medical tourism target
According to KPJ’s presentation slides, Malaysia’s health tourism revenue is estimated to have surpassed RM2bn in 2023F (Jan-Nov 23: RM1.9bn, according to Malaysia Healthcare Travel Council); however, health tourism only contributed RM190m (or 5.5%) to KPJ’s FY23 revenue, translating into a Malaysian health tourism market share of c.9%. In contrast, KPJ’s bed capacity of 3.7k hospital beds represent c.20% of the estimated total bed capacity of 17k beds across private hospitals in Malaysia in 2022, according to Statista.
As such, management sees room to grow its health tourism segment. Of its RM380.0m capital commitment in FY24F, RM165.2m has been earmarked for medical equipment, such as investments into the Da Vinci vision system for robotic surgery.
KPJ has guided for total FY24F capex to reach RM450.0m (vs. FY23’s RM237.5m). More recycling of non-core assets underway.
Following the disposal of its aged care business in Australia (i.e. Jeta Gardens), KPJ has identified its hospital in Bangladesh (KPJ Dhaka), as well as its retirement village operations in Australia as other non-core assets that it is looking to dispose.
CGSCIMB understood from the management that KPJ Dhaka is contributing positively to its bottom line (albeit insignificantly) but does not play into KPJ’s strategic positioning, while its retirement village operations formed only c.10% of KPJ’s previous exposure to Australia (Jeta Gardens formed 90% of KPJ’s Australia business prior to its disposal). Reiterate Add; more growth to come in FY25F
CGSCIMB’s TP of RM1.87 is pegged at 30x FY25F P/E, as they think KPJ will see better operating leverage from its investments to expand capacity in FY24F.
Re-rating catalysts: stronger contribution from medical tourism, and turnaround of gestating hospitals that could boost margins.
CGSCIMB said the downside risks include delayed capacity expansion due to escalating competition for nursing manpower, and slower recruitment of consultants.
