by NUR HAZIQAH A MALEK / pic source: KPJ Sri Manjung Specialist Hospital FB
KPJ Healthcare Bhd’s core earnings of RM21 million for the first half of the year (1H21) is below expectations due to higher-than-expected operating costs.
As a result, CGS-CIMB Securities Sdn Bhd analyst Syazwan Aiman Sobri downgraded the counter to ‘Hold’ as the healthcare service provider’s current stock valuations appear to have priced-in a recovery in financial year 2022 (FY22).
“The core net profit for 1H21 came in below expectations at 16.4% and 18.6% of our and Bloomberg consensus previous FY21 forecasts, mainly due to weaker than expected operating margins.
“Although 1H21 revenue grew by 8.5% year-on-year (YoY) due to the management of select Covid-19 cases, vaccination services offered as part of the National Covid-19 Immunisation Programme and higher occupancy as a result of the decanting of non-Covid-19 patients from public hospitals, higher-than-expected operational costs incurred led to the Ebitda margin contracting by 3.6% points in the period under review,” he noted in a report yesterday.
Syazwan added that higher depreciation and fixed costs from the expansion of KPJ Sri Manjung and KPJ Taiping hospitals, both of which opened in the second quarter of 2021 (2Q21), contributed to the increase in operational costs during the quarter.
“The bed occupancy rates (BOR) for 2Q21 in its Malaysian operations rose to 41% versus 35% in 2Q20 and 39% in 1Q21, which we believe was aided by higher admittance of non-Covid-19 patients from public hospitals,” he added.
In the 1H21, the group saw revenue increase at its overseas operations.
In the 1H21, KPJ Healthcare’s Indonesian operations saw revenue grow by 27% YoY to RM18.8 million, mainly due to higher in-patient visitation, which was driven by a higher number of Covid-19 cases managed.
“For its aged care and retirement village in Australia, such as the Jeta Gardens, KPJ Healthcare reported a higher occupancy rate in the 1H21, at 83% versus the previous 78% rate, which resulted in an 11.8% improvement in revenue on a YoY basis,” he noted.
CGS-CIMB expects the BOR at KPJ Healthcare to stay weak in the 3Q as Covid-19 cases remain elevated with only a gradual recovery to start in the 4Q.
“We expect BOR at its Malaysian operations to stay well below pre-pandemic levels in 3Q21 as Covid-19 cases in Malaysia remain high.
“We also expect the intensity of managing select Covid-19 patients and decanted non-Covid-19 patients from public hospitals to remain elevated in 3Q21F, which could put downward pressure on margins,” he said.
Syazwan has downgraded KPJ Healthcare to a ‘Hold’ from ‘Add’ and with a lower target price (TP) of RM1.05 in line with earnings cuts.
“Our TP is based on 24.5 times the calendar year 2022 price-to-earnings (P/E) ratio, in line with its 10-year average forward P/E, and we believe that current valuations fairly reflect an expected gradual recovery in FY22,” he said.
Re-rating catalysts include a swift recovery in patient visitations and revenue intensity, while downside risks include longer-than-expected gestation periods for new hospitals and weaker-than-expected patient visitations.