CIMB Securities Research said reduced losses from its five new hospitals and central procurement will boost margins.
PETALING JAYA: Bed capacity expansion will be the key driver for KPJ Healthcare Bhd
’s top-line growth in the next three years, says CIMB Securities Research.
“Over the financial years 2023 to 2026 (FY23-FY26), KPJ aims to increase its bed capacity from 3,643 to 5,000, mainly through brownfield expansions, except for a new 60-bed facility in Kuala Selangor scheduled to open in the first quarter of 2025 (1Q25).
The strategy of lower capital expenditure for expansion should help sustain the bottom line, the research firm said in a report, resuming coverage on the stock with a “buy” rating and target price of RM2.60.
According to CIMB Securities Research, reduced losses from its five new hospitals and central procurement will boost margins.
On the profitability front, it said KPJ’s core net profit growth is expected to accelerate on a compound annual growth rate of 12.2% over FY23 to FY26, driven by reduced losses from five new hospitals – KPJ DSH2, Bandar Dato’ Onn, Batu Pahat, Perlis and Miri.
Four of the hospitals have reached break-even levels on an earnings before interest, taxes, depreciation and amortisation (Ebitda) basis in 1Q24, with Miri projected to follow by 4Q24, the research firm said.
The healthcare group is also looking at disposing of loss-making assets, specifically its operations in Indonesia and Australia, while the implementation of a central procurement system will enhance cost efficiency.
“One of the key highlights of KPJ’s five-year transformation roadmap is the establishment of Centres of Excellence (CoEs) across its hospital network to elevate the level of care provided.
“We view this positively, as this will boost KPJ’s revenue intensity, by enabling the handling of more complex cases.
“That said, we reckon that near-term impact may be modest, as establishing a strong presence for the CoEs in various sub-specialties could take several years, especially amid increasing competition in the private healthcare sector.”
The RM2.60 target price implies a valuation of 11.1 times FY26 enterprise value (EV) over Ebitda, which is a premium to its five-year forward mean of nine times.
However, the research house said the premium is justified, given the strategic initiatives and swift execution under the new management team in positioning KPJ for its next growth phase.
“Additionally, KPJ’s long-term strategy aims to elevate the level of care, targeting patient flows from the middle and high-income brackets, further supporting our positive outlook.
“Historically, from FY14 to FY19, KPJ traded at about 44% discount to IHH Healthcare Bhd’s EV over Ebitda.”
Meanwhile, Kenanga Research sees a “solid second half of 2024” (2H24) for KPJ and has raised the stock’s target price to RM2.11, from RM1.95.
“Our recent channel checks point to no sign of patient throughput slowing down at KPJ’s hospitals despite the tapering of pent-up demand for elective surgeries after the pandemic, which has been sustained longer than our expectations, paving the way for KPJ to perform beyond our earlier assumptions for 2H24.”
Kenanga Research said there could also be a potential boost from a lower effective tax rate, as it typically utilises its tax benefits arising from unutilised capital allowances and tax losses for new businesses under gestation and recognition of tax allowances in 4Q24.
“Coupled with the second half typically being stronger than the first half, our FY24 net profit forecast of RM273mil before our upgrade appeared to be conservative. Beyond 2024, it will add over 1,500 beds, bringing total beds to 5,000 over the next five years, which we have already factored into our forecasts,” the research house added.
In terms of bottom-line profitability, Kenanga Research expects earnings to gain momentum moving into FY25 on better operational efficiencies from its cost optimisation efforts and overhead absorption rate, as a result of a gradual ramp-up in opening new beds.
“We raise our FY24 to FY25 net profit by 5% and 8%, respectively, as we lift our patient throughput assumptions to 10% each, from 9% previously,” the research house said.
