Analysts cautious on KPJ despite higher 2018 earnings


Research firms remain cautious on KPJ Healthcare Bhd on concerns of potential gestation costs arising from new hospital openings, despite the group recording improved earnings for the financial year ended Dec 31, 2018 (FY18).

AmInvestment Bank Bhd said KPJ is expected to intensify promotion activities to promote its new hospitals in neighbouring countries, namely KPJ Bandar Dato’ Onn, Johor, scheduled to open this month and the expected opening of KPJ Kuching in the second quarter of 2019.

“We anticipate KPJ’s earnings before interest, taxes, depreciation and amortisation margin in FY19 to be circa 13% as we expect gestation costs stemming from its new hospital openings to offset any margin boost from the group’s ongoing cost optimisation or an increase in inpatient admissions.

“We like KPJ Healthcare for its vast network of hospitals in Malaysia, capacity expansions and it being a potential beneficiary of the health insurance scheme. However, we believe at its current share price, the stock is close to its full valuation,” AmInvestment said in a research report yesterday.

The research house also maintained its ‘Hold’ recommendation on KPJ with an unchanged target price (TP) of RM1.15.

MIDF Research said moving forward, it expects further improvements in revenue contributions from KPJ’s new hospitals, as well as its matured hospitals.

“The aggressive opening of greenfield and brownfield developments would further accelerate the revenue growth rate for the year.

“The key risks to our call recommendation are delay in opening of new hospitals, longer than expected gestation period for new hospitals, lower than expected inpatient admissions and revenue per patient, as well as increase in operations cost,” it noted.

KPJ’s Indonesian operations are expected to remain loss-making in the foreseeable term, it added.

MIDF Research also maintained its ‘Neutral’ call on the healthcare service provider, but revises its TP from RM1.11 to RM1.14 per share.

Public Investment Bank Bhd concurred and said KPJ’s patient volume and revenue growth moving forward will be sustained by the opening of new hospitals and the expansion of existing hospitals.

“However, we remain cautious over potential earnings dilution from gestation period of new hospital commencement.

“We maintain our earnings and ‘Neutral’ call with a TP of RM1.04,” it stated.

KPJ’s net profit for FY18 rose 10.83% to RM179.44 million, while revenue increased 4.09% to RM3.31 billion.

The Malaysian business segment’s pre-zakat and tax profit rose 12% to RM278.2 million for the year, contributed by the firm’s cost optimisation initiatives.

Revenue for the segment also increased 4% to RM3.21 billion, due to the increase in number of patient visits, number of beds and surgeries particularly for KPJ Rawang, KPJ Pasir Gudang and KPJ Bandar Maharani.

“The group’s sterling performance and operations excellence will continue to accelerate in 2019, with the opening of more new hospitals and other healthcare facilities,” KPJ said in a filing to Bursa Malaysia on Tuesday.

“The rising cost in healthcare industry will continue to be the group’s main challenge.

“With continuous monitoring over operational excellence and focus on revenue growth along with disciplined cost management, the group is confident to lead improvements and further its vision of becoming the preferred healthcare provider,” it added.