This article first appeared in The Edge Financial Daily on April 21, 2020

KPJ Healthcare Bhd
(April 20, 89 sen)
Maintain buy with a lower target price (TP) of RM1.09: We expect the second quarter (2Q) to be heavily impacted by Covid-19 whereas 1Q will not see much of the brunt. As such, we revise our financial year 2020-2021 (FY20-21) forecasts downwards by 18%-13% in view of lower occupancy due to Covid-19 as we anticipate the post-movement control order (MCO) effects to linger. Post-earnings adjustment, our sum-of-the-parts-based TP decreases to RM1.09 (from RM1.27). We maintain “buy” due to KPJ Healthcare Bhd’s wide domestic geographical hospital network spread.

Under the MCO period, KPJ remains fully operational as hospitals need to comply with nursing ratios as per the health ministry’s requirements. We foresee short-term headwinds as patients are delaying non-urgent treatment. Even before the MCO, KPJ had suggested patients delay non-urgent treatments and only come in for urgent ones, resulting in a drop in occupancy. 

The first three weeks of the MCO brought KPJ’s occupancy to drop to 25% from its average rate of 65% (FY19). While the MCO period is for 1.5 months, its impact may be more profound than that as we feel people will still be stigmatised to be near hospital compounds if not necessary.

Whilst healthcare tourism has come to a halt with foreign tourists being banned from entering the country, this is the least of their problems as KPJ’s healthcare tourism accounts for around 5% of total revenue (FY19). 

KPJ started performing Covid-19 testing since the beginning of March, and to date it has 13 hospitals that are equipped to do Covid-19 testing, inclusive of eight drive-thru testing. 

In the initial stages, KPJ started the Covid-19 testing at RM630 per test and since then it has scaled up its testing capacity (from 150 tests per day to 1,000 tests per day). Thus, it has managed to bring down the cost per test to RM388. 

In assisting the government to combat the health crisis, KPJ has loaned 25 ventilators to various public hospitals across the country for free. 

While Covid-19 cases are solely dealt with by public hospitals, KPJ has prepared 200 beds to accommodate non-Covid-19 patients should the need arise. 

Apart from that, there may be potential arrangements to allow surgeries scheduled by public hospitals to be done in private hospitals. KPJ would be more than ready to assist to free up capacity of the former, though margins would be thin.

Nevertheless, we expect KPJ’s 1Q results to likely to chalk up decent numbers (with minimal impact of the MCO which started mid-March) but 2Q could be weak, bearing the brunt of the MCO/Covid-19 impact (a significant drop in non-critical patient volume). In addition, the scheduled opening of new hospitals in Kuching and Kluang has now been deferred to 3Q.

We tweak our FY20-21 earnings forecasts downwards by 18%-13% in view of the Covid-19 outbreak by lowering our inpatient and outpatient assumptions. — Hong Leong Investment Bank Research, April 20