This article first appeared in The Edge Financial Daily on October 4, 2018
KPJ Healthcare Bhd
(Oct 3, RM1.09)
Maintain buy with an unchanged target price (TP) of RM1.27 per share: We had the opportunity to visit KPJ Rawang and were hosted by the group’s senior management. The following are some of the key takeaways:
KPJ Rawang first opened its doors in 2014 with 30 operating beds at the initial phase. It is a 160-bed capacity specialist hospital and is a typical success story within the private hospital space. KPJ Rawang turned profitable as at early-2018, driven by several overarching factors, namely: location, lack of competition, pent up demand and organic growth in tandem with population boom in northern Selangor.
There are no other private hospitals between Ipoh and Rawang and as such, all population catchments between Slim River and Tanjung Malim are fair game for KPJ Rawang. Their next closest competitor being UITM Sg Buloh specialist hospital (30 beds) is some 25km away. KPJ is also blessed with a population catchment of around 1.3 million people within a 30km radius.
Typically staff turnover is a source of concern for many private hospitals. However, this is not the case at KPJ Rawang as the doctors and nurses are Rawang locals and many are from sister hospitals (thus are familiar with the KPJ operational process). The fact that there is no competition for their nurses in the area also aids in staff retention.
Since opening its doors in 2014, KPJ Rawang has shown a tremendous four-year compound annual growth rate (CAGR) of 40%-42% for both inpatient and outpatient traffic. The management expects that FY18 will see a leap in patient traffic, 27% year-on-year (yoy) (inpatient) and 55% yoy (outpatient) driven by operational and patient flow maturity.
Occupancy rates had approached above 75% level as at FY17 marking a signal for the hospital to expand. Management is toying with the idea of building a new block after acquiring an adjacent piece of land. An alternative is more viable and will result in a faster ramp-up period. This will be done by leasing the existing mall across KPJ Rawang and shifting all the outpatient outfits there and converting the existing structures into a pure inpatient centre. This is expected to garner an additional 200 beds.
A catalyst for KPJ Rawang in the near term will be the ultimate relocation of Proton’s Shah Alam factory to Tanjung Malim which has been touted to be completed by 2022-23. This move is expected to shift around 20,000 workers from the Shah Alam plant. We expect the population boom in Tanjung Malim will continue to drive KPJ Rawang’s earnings in absence of a competitor and will justify her expansion plans.
Our TP implies FY19-20 EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) of 12.7x-11.9x. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. We can expect a seasonally stronger 2HFY18 in tandem with KPJ’s historical trend. — Hong Leong Investment Bank Research, Oct 3