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This article first appeared in The Edge Financial Daily on August 13, 2019

KPJ Healthcare Bhd
(Aug 9, 91 sen)
Maintain buy with an unchanged target price (TP) of RM1.18:
We recently visited KPJ Healthcare Bhd’s latest flagship hospital and centre of excellence, KPJ BDO (Bandar Dato Onn) in Johor which, in February 2019, saw its soft launch. KPJ BDO, with a build-up of 10 storeys on a 13-acre (5.26ha) land, is one of the more sophisticated private hospitals we have seen in Malaysia in aesthetics and architecture.

 

Designed to house over 400 beds, the current phase consists of a wing with an installed capacity of 150 beds. During our visit, there were about 30 operational beds as the hospital had only opened recently. KPJ BDO will have about 32 specialist consultants at the full ramp-up of its first phase, offering nine core services including orthopaedics, paediatrics, oncology, obstetrics and gynaecology, geriatrics and nephrology — relatively underserved in Johor.

Johor has a population of about 3.3 million, with about 1.5 million of them concentrated around Johor Baru and its surrounding suburbs. Based on the latest health indicators released by the health ministry, they imply Johor has a bed of 1,000 person’s ratio of 1.4 — below the national average of 1.6 and significantly below its sister cities of Kuala Lumpur (2.9) and Penang (2.4). The metric implies Johor’s industrialisation continues to forge forward and we can expect the ratio to converge.

KPJ BDO, nestled amid Johor Land, Nasa City, Setia Tropika and Austin Heights developments, is poised to tap into the long-term population growth as these developments mature. We understand that Columbia Asia Tebrau will also open in the second half of 2019; Columbia Asia’s hospitals are secondary ones managing bread-and-butter cases only — their modus operandi is to refer complex cases to specialist hospitals, thus acting like a spoke hospital for KPJ Healthcare Bhd and its peers. With the new Columbia Asia Tebrau only 11km south of KPJ BDO, we opined this will complement its operations and ramp-up period.

KPJ BDO is the fourth last in the build, own and operate-model greenfield hospitals followed by KPJ UTM, KPJ Melaka and KPJ Kota Bayuemas, before moving to the operate-and-lease model which should lessen the group’s balance sheet burden. For the rest of financial year 2019 (FY19), we can expect a network expansion to shift the focus towards Sarawak with the opening of KPJ Kuching Specialist Hospital (brownfield, with 150 beds), and KPJ Miri Specialist Hospital (greenfield; 96 beds) — the first tertiary hospital in Miri to tap into the oil and gas community there.

We can expect flattish second quarter of FY19 (2QFY19) results with a downside bias due to the Ramadan seasonality. Nonetheless, on aggregate we are expecting the overall performance to maintain the trajectory of 1QFY19 on an improved sustained organic growth from existing hospitals and contributions from newly opened ones.

We maintained our “buy” call and TP of RM1.18. Our TP implies FY19 and FY20 enterprise value and earnings before interest, taxes, depreciation and amortisation of 11.3 times to 10.5 times. We like KPJ Healthcare as it offers investors an exposure to a pure Malaysian hospital play. We feel the valuation gulf between KPJ Healthcare and its peers  exposed to global markets warrants a reassessment. The risk to reward has skewed more towards KPJ Healthcare’s favour, in view of it lacking presence internationally and exposure to external volatility. — Hong Leong Investment Bank Research, Aug 9

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