This article first appeared in The Edge Financial Daily on June 25, 2019
KPJ Healthcare Bhd
(June 24, 97 sen)
Maintain buy with an unchanged target price (TP) of RM1.35: We maintained our “buy” recommendation on KPJ Healthcare Bhd with a TP of RM1.35, implying a valuation of 30 times financial year 2019 (FY19) earnings per share, in line with its historical mean valuation. We believe the group should trade closer to its mean price-earnings (PE) valuation of 30 times given the sector’s prospects remain bright and concerns over the Malaysian Financial Reporting Standards 16 are overplayed.
Despite the negative earnings impact from adopting the new accounting standard, we are still anticipating a year-on-year positive earnings growth for FY19, driven by the sector’s better prospects and its cost-optimisation exercise. In the longer term, we believe the medical tourism segment could serve as an earnings kicker for KPJ Healthcare, with the authorities and KPJ Healthcare focusing on growing this market.
We differ in our TP, at the higher end of the consensus range, as we believe the stock should trade closer to its implied historical mean PE valuation amid the sector’s better earnings prospects. Potential catalysts are higher-than-expected patient volumes driven by an improved healthcare affordability, and a stronger-than-expected profit margin due to lower input costs.
Key risks to our view include a longer-than-expected gestation period for new hospitals. A new hospital takes about three to five years to become profitable. KPJ Healthcare’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 is too rapid. — AllianceDBS Research, June 24