KPJ Healthcare to provide long-term gains

PETALING JAYA: HLIB Research has initiated coverage on KPJ Healthcare Bhd, citing exposure to a pure Malaysian hospital play and its niche regional hospital network that channels patients to its urban specialist centres.
“While its gearing is high relative to its peers, it is manageable and should taper off once assets are injected into the REIT (real estate investment trust) or disposed. However, we initiate with a ‘hold’ as we believe that at this juncture the stock is fully priced,” the research house said in an initiation report today.
HLIB said KPJ, with 25 private hospitals in Malaysia, is the leading domestic player with 23% of market share. With the exception of Malacca and Terengganu, its presence is felt nationwide.
It added that KPJ has expanded into less densely populated tier-2 cities (such as Manjung and Muar). This regional feeder network operates in a less competitive environment and serves as a pipeline to refer more complex cases to its specialist hospitals. This network affords KPJ almost uncontested brand loyalty in the second-tier towns.
Relative to Malaysia’s peers within the region, the level of health insurance penetration is low. Singapore and Hong Kong have both achieved an insurance penetration rate of above 10% of GDP, whereas Malaysia as at 2016 stood at 4.5% of GDP in 2016. HLIB expects this gap to narrow as Malaysia marches towards developed status.
Newly installed capacity from greenfield and brown field network expansions are expected to boost KPJ’s total capacity from 3,000 beds currently to over 5,000 beds by 2020, representing an 87% growth in total capacity.
To combat sluggish growth and earnings drag from greenfield hospitals, the group has steadily shifted its capacity expansion strategy towards brownfield hospitals, which are less capital intensive and have a faster ramp-up period.
“This strategy, in our view, is expected to be earnings accretive in the near term whilst allowing the group to manage its gearing levels,” said HLIB.
It said risks to the stock include lower- than-expected ramp-up in patient revenue due to a laggard price revision, higher-than- expected drug costs due to the weak ringgit and longer-than-expected gestation period for its greenfield hospitals coupled with strong pricing competition from smaller niche hospitals.
“We project a modest FY17-20 earnings growth of 9%, 11% and 10%, driven by newly opened hospitals and higher revenue intensity. All in all, this implies three-year earnings CAGR of 11%,” said HLIB.
It initiated with a target price of RM1.18, which it said is justified due to KPJ’s relative illiquidity, lower return on equity and higher net gearing.
The stock closed down five sen to RM1.03 with some one million shares changing hands. It has a market capitalisation of RM4.34 billion.