KPJ HEALTHCARE BHD

By Hong Leong Investment Bank Hold

Target Price: RM1.18

KPJ Healthcare Bhd has expanded into less densely populated tier-two cities (which include Manjung and Muar).

This regional feeder network, according to Hong Leong Investment Bank (HLIB), operates in a less competitive environment and serves as a pipeline to refer more complex cases to its specialist hospitals and the network allows KPJ almost uncontested brand loyalty in the second tier towns.

Where health insurance was concerned, the research house said relative to peers within the region, the level of insurance penetration was low.

“Singapore and Hong Kong have both achieved an insurance penetration rate of above 10% of gross domestic product product (GDP), whereas Malaysia as at 2016 stood at about 4.5% of GDP.

“We expect this gap to narrow as Malaysia moves towards developed nation status,” the house said.

In terms of long term growth, HLIB reckoned that newly-installed capacity from green field and brown field network expansions were projected to boost total capacity from 3,000 beds currently to over 5,000 beds by 2020, representing an 87% growth in total capacity.

In efforts to combat sluggish growth and drag in earnings from greenfield hospitals, HLIB noted that the group had steadily shifted its capacity expansion strategy towards brownfield hospitals, which were less capital intensive and had faster ramp up period.

“This strategy, in our view, is expected to be earnings accretive in the near term and allows the group to manage its gearing levels,” HLIB added.

The research house projected a modest financial year 2017 (FY17) to FY20 earnings growth of 9%, 11% and 10%, driven by newly opened hospitals and higher revenue intensity.

This implied a three-year earnings compounded annual growth rate of 11%.

“Our target price implies an FY18 forecast earnings before interest, tax, depreciation and amortisation multple of 14.3 times, a 21% discount to the peers’ average of 18.1%.”