Higher patient volume, profit margin seen for KPJ Healthcare

This article first appeared in The Edge Financial Daily, on June 11, 2018.
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KPJ Healthcare Bhd
(June 8, RM1.10)
Maintain buy with a target price (TP) of RM1.30:
We maintain our positive stance on KPJ Healthcare Bhd post our meeting with management. Despite its recent share-price strength, we note that the stock is trading at 24 times financial year 2018 (FY18) earnings per share (EPS), which is around -1 standard deviation of its historical mean. Furthermore, the decent results for its first quarter of FY18 (1QFY18) reaffirm our investment thesis that the group’s operations are poised to pick up in FY18, as we expect the positive momentum to continue in the upcoming quarters.

Our TP is at the higher end of the consensus range given that our earnings estimates are higher than consensus as we expect all its hospitals opened in the past few years to turn around by this year and we are relatively aggressive in our valuation metrics as we believe that the stock should trade closer to its implied historical mean price-earnings ratio valuation, particularly with the better earnings prospects. Potential catalysts include higher-than-expected patient volumes driven by improved healthcare affordability and stronger-than-expected profit margin due to lower input costs.

We reiterate our “buy” recommendation for the group with a RM1.30 sum-of-parts-based TP (14 times FY18 enterprise value/earnings before interest, taxes, depreciation and amortisation) for hospital operations and 6% yield for its 38% stake in Al-’Aqar Healthcare Real Estate Investment Trust. This represents a valuation of 30 times FY18 EPS, which is in line with its historical mean valuation.

Key risks to our view include longer-than-expected gestation period for new hospitals. A new hospital takes around three to five years to become profitable. KPJ’s near-term earnings could be dragged by high start-up losses at the new hospitals, if the gestation period is longer than expected, or if its expansion plan proves to be too rapid. — AllianceDBS Research, June 8