This article first appeared in The Edge Financial Daily on September 18, 2017 - September 24, 2017

KPJ Healthcare Bhd
(Sept 15, RM4.37)
Downgrade to hold with a lower target price of RM4.67: KPJ continued to experience subdued patient traffic in first half of financial year 2017 (1HFY17) with marginal changes in outpatients (-1.5% year-on-year [y-o-y]) and inpatients (+1% y-o-y). Management alluded that this was beyond the seasonally slower second quarter (2QFY17), marked by the Ramadan season and festive holidays, whereby both outpatients and inpatients declined quarter-on-quarter (q-o-q) respectively by 0.5% and 2.3%.

Other contributing factors included: i) general practitioners being more economical alternatives for outpatients seeking primary care amid the weak market sentiment, ii) competition from some new private hospitals (that is Columbia Asia versus KPJ Damansara in Petaling Jaya & Gleneagles Kota Kinabalu versus KPJ Sabah in Sabah), and iii) the absence of new hospital openings since 2015 (KPJ Pahang which opened in May 2016 is considered an exception due to it being a relocation project for Kuantan Specialist Hospital).

We view the absence of new hospital openings as a key factor, the reason being that IHH Healthcare Bhd, the group’s closest competitor in Malaysia in terms of bed capacity, has fared better with inpatient growth of 3.9% y-o-y alongside the ramp-up of its newer hospitals which opened in 2015 — Gleneagles Kota Kinabalu in Sabah and Gleneagles Medini in Johor.

Management is hopeful that patient traffic for FY17 should at least sustain y-o-y. Supportive of this, we understand that amid prevailing economic uncertainty, the group’s tie-ups with corporate clients like insurance companies and managed care organisations have been mostly intact.

Corporate clients continue to account for the bulk of the group’s revenue at about 70% with the balance of about 30% by out-of-pocket paying patients. Also, helping to offset the slowdown at older hospitals faced with competition, we note that most of the group’s newer hospitals continue to experience improvements in patient traffic.

Of the six newer hospitals opened across the past five years, all are earnings before interest, taxes, depreciation and amortisation positive with two profit before tax positive. Meanwhile, we note that the group has been offering promotional screenings to outpatients as they might be potential inpatients if any procedures are required or prescribed.

Also, to stay competitive, efforts are being made to keep costs and prices in check, but management does not discount the possibility for price revisions to account for medical inflation, the last of which was effected during 3QFY16/4QFY16. — TA Securities, Sept 15