KPJ Healthcare’s earnings growth expected to continue
KPJ Healthcare Bhd (Jan 16, 94 sen) Maintain outperform with an unchanged target price of RM1.06: We came away from a recent meeting with KPJ Healthcare Bhd feeling positive on its prospects ahead. The main issues discussed revolve around KPJ’s planned hospital expansion, latest developments of KPJ Bandar Dato Onn’s (KPJ BDO) multidisciplinary hospital licence application, as well as the proposed drug price control mechanism.
We remain upbeat on the group as we believe KPJ will continue to deliver earnings growth, driven by earlier openings as well as new hospital openings in the pipeline.
KPJ achieved three new hospital openings in 2019, which were KPJ BDO (opened in February), KPJ Batu Pahat (September) as well as KPJ Miri (late December). Relocation of KPJ Kluang and KPJ Kuching, previously scheduled for the fourth quarter of 2019, has been pushed back to early 2020, while the opening of KPJ Damansara II is expected to be in the second half of 2020.
Currently, four hospitals are still under their gestation period, namely KPJ Sabah, KPJ BDO, KPJ Batu Pahat as well as KPJ Miri. Going into 2020, we expect the start-up cost to be manageable, given that earlier openings can help mitigate start-up losses.
Furthermore, we are of the view that loss of income and the moving cost arising from the relocation of KPJ Kluang and KPJ Kuching would not drag its respective performance into the red, considering that KPJ already has presence through its existing operations in the areas and the hospitals are only required to scale down operations for two weeks to facilitate the move.
Being a centre of excellence (COE), KPJ BDO previously had a narrower focus, offering only limited areas of care to the public. A COE also tends to handle more outpatient consultation cases and translation into inpatient cases is relatively lower than in multidisciplinary hospitals.
This has resulted in KPJ BDO’s rather low occupancy rate of 25%. However, upon obtaining the approval of the ministry of health (MoH) to operate as a multidisciplinary hospital, KPJ BDO is now allowed to provide a wider scope of medical services to patients, involving more specialties. With the approval in hand, we believe the occupancy rate of KPJ BDO will gradually improve and help cushion start-up losses.
In relation to the proposed drug price control approved by the cabinet, we note that the MoH is still gathering feedback from various industry stakeholders but KPJ believes that the mechanism may not be put into effect in the near term.
The implementation of the drug price control mechanism might also bring about negative repercussions, impeding single-source drug manufacturers from introducing new and innovative medicines in Malaysia as it becomes less lucrative than other markets. With regard to drug pricing in Malaysia, the Pharmaceutical Association of Malaysia has revealed, based on a study done in 2014 against Asia-Pacific Economic Cooperation countries, that drugs in Malaysia are priced within a relatively reasonable range.
However, should the price control mechanism materialise in future, we are of the view that the impact on KPJ would be minimal as KPJ can hike other unregulated charges to cushion a possible revenue shortfall. — PublicInvest Research, Jan 16
Source: TheEdgeMarkets