AllianceDBS Research maintains positive view on KPJ Healthcare

KUCHING: Despite KPJ Healthcare Bhd (KPJ) experiencing a recent share price rally of circa 10 per cent, the research house AllianceDBS Research Sdn Bhd (Alliance DBS Research) is still positive on the group as they believe that its upsides have not been fully priced in yet.

In company guide report, the research house detailed the stock is currently trading around -1SD of its historical mean and that the group’s recent optimistic results for its first quarter of financial year 2018 (1QFY18) have reaffirmed their investment thesis that the group’s operation are poised to pick during the remainder of FY18.

“We expect the positive momentum to continue in the upcoming quarters,” they said.

KPJ’s 1QFY18 results saw a +6 per cent year over year (y-o-y) increase to its registered core earnings of RM42 million and was mainly attributed to improving contributions from its local operations, where revenue and earnings increased by 6 and 4 per cent respectively.

The improved local earnings were triggered by improving consumer sentiments which saw strong outpatient and inpatient volume growths of 4.1 and 5.2 per cent y-o-y respectively.

Coming away from a meeting with KPJ’s management, AllianceDBS Research detailed that they came away optimistic that the strong operation statistics seen in 1QFY18 would continue for the remainder of FY18 due the strengthening economic growth that would lead to improved healthcare affordability, continued improving consumer sentiments, and the expected profitability of KPJ’s newly opened hospitals.

The improving consumer sentiment is expected to continue with patient throughput estimated to grow by 2 and 1 per cent in FY18 and FY19.

The research house attributes this to the healthcare sector’s current secular growth trend which is driven by a rising population and increasing household income.

“It will be difficult for the Malaysian public health care system to cope with the growing demand, as capacity constraints are expected to worsen.

“This would drive affluent patients to the private hospitals. KPJ stands to benefit from this trend, given its nationwide hospital network and ample capacity to meet growing demands,” said AllianceDBS Research.

Besides this, the healthcare giant is also poised to witness improved earnings growth moving forward as its five hospital that were opened in the past few years have all turned EBITDA positive, with on KPJ Bandar Maharani specialist hospital and KPJ Sabah specialist hospital registering net losses at present.

According to the research house, the latter two are expected to turn profitable towards the later part of the year.

And for the group’s newest expansions – KPJ Perlis which opened on May 16 and KPJ Bandar Dato Onn’ which will open in early 4Q – it is anticipated that their start-up losses will be minimized as KPJ’s management has guided that they will be cautiously scaling up its operating beds.

With another two more hospitals in the pipeline for 2019, the group is expected to see its operating beds grow from 3,052 in 2017 to 3,607 in 2020.

Looking forward, the research house also guides that there is also more room for an earnings upside for the group due to the abolishment of the GST as KPJ has been absorbing the 6 per cent GST input tax on drugs and medicine that is not under the tax-exempted National Essential Medicines List (NEML).

Moreover, the strengthening Ringgit will also bode well for the group as it will lower imported drug costs.

While it sounds like KPJ is in for a smooth ride for the remainder of FY18, the group will still be facing some challenges from its overseas ventures as its Indonesia operations have registered a loss of RM0.7 million in 1QFY17 due to changes in the Indonesian national health insurance system that caused reduced patient volumes.

According to its management, the loss is expected to continue and has prompted AllianceDBS Research to increase their forecast for FY18-20 to RM3.0 million loss, RM1.0 million loss and break-even respectively. Previously, the research house’s forecast was an RM1.0 million loss in FY18 and a break-even in FY19.

“Nonetheless, we believe that the quantum of the losses will remain small and do not expect this to adversely impact overall group earnings,” said the research house.

All in, AllianceDBS Research is forecasting that KPJ’s revenue for its inpatient and outpatient segments will grow at a compound annual growth rate (CAGR) of 8 and 7 per cent respectively in FY18-19F.

And will be maintaining their ‘Buy’ recommendation for the group with a target price of RM1.30 which is based on a sum of parts valuation of 14-fold FY18F EV/EBITDA for hospital operations and a 6 per cent yield for the group’s 38 per cent stake in Al-Aqar Healthcare REIT.