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This article first appeared in The Edge Financial Daily on October 13, 2017

KPJ Healthcare Bhd
(Oct 12, RM1.02)
Maintain neutral with target price (TP) of RM1.02:
We came away from a recent meeting with positive views on KPJ Healthcare Bhd’s ongoing expansion plans and prospects ahead. Among the key issues discussed are: i) inpatient versus outpatient volume trends, ii) escalating medical costs and price revisions, iii) potential disposal of Jeta Gardens, and iv) capacity expansion and greenfield projects to continue driving growth. Overall, we expect KPJ’s growth to remain steady and sustainable in the near to medium term. 

Our earnings estimates are unchanged and we maintain our “neutral” view on the stock with a TP of RM1.02. Overall patient patterns for KPJ’s established hospitals have been rather subdued, but the numbers have been boosted by KPJ’s newer hospitals which have seen robust growth in patient volume. 

For the second half of financial year 2017 (2HFY17), we expect patient volume to be sustainable year-on-year (y-o-y), on the back of promotional efforts and higher number of cases undertaken in new hospitals along with increase in visibility and accessibility from surrounding townships. 

Escalating costs are expected to remain a key challenge to KPJ in keeping margins intact. Drug costs and medical supplies were among the most affected by the weakening currency. Price revisions will likely be forthcoming by year end, but will be implemented delicately due to potential impact on patient volume. 

We understand that management is actively exploring alternative options for Jeta Gardens, with selling off being the most practical choice with talks and discussions currently underway. If the disposal is successful, we believe it would allow KPJ to relieve itself of possible incurrence of further losses in addition to redirecting capital expenditure commitments to other rewarding investments. 

The first project in the pipeline to come on board is KPJ Perlis, which should be ready to open in December this year. Greenfield projects include KPJ Bandar Dato’ Onn, which will be targeting the premium market, and KPJ Miri, which will be KPJ’s second hospital project in Sarawak, both planned for opening by mid-2018.

Our valuation is premised on 25 times price-earnings, pegged to our FY18 earnings per share of 4.1 sen. Though we are upbeat on KPJ’s growth prospects supported by its ongoing projects, we remain cautious on possible delays or hurdles in project executions and longer-than-expected gestation period of new hospitals. 

We also keep an eye on margin sustenance through price revisions, versus maintaining patient volume trends at group level. Hence, we remain “neutral” on KPJ at this juncture. — PublicInvest Research, Oct 12

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