AllianceDBS: Better sector prospects to boost KPJ earnings

PETALING JAYA: Positive earnings growth is seen for KPJ Healthcare Bhd in FY19, driven by better sector prospects and the group’s cost-optimisation exercise.

This, AllianceDBS Research said, is despite the anticipated negative earnings impact from the adoption of the new accounting standard, MFRS16: Leases.

“In the longer term, we believe that that the medical tourism segment could serve as an earnings kicker for KPJ with both the authority and KPJ focusing to grow this market,” it said in a note.

The research house maintained its “buy” call on the healthcare group with a target price of RM1.35.

The research said this implied a valuation of 30 times FY19 earnings per share, which was in line with the group’s historical mean valuation.

It believes that KPJ should trade closer to its mean price to earnings (PE) valuation of 30 times, given that prospects of the sector remain bright, and concerns over MFRS16 have been overplayed.

“We like the stock for its resilient earnings, which are underpinned by its steady inpatient and outpatient volumes. Besides that, we believe that KPJ serves as a pure play in the Malaysian healthcare space,” it said.

The key risks to its Buy call on the counter, it said, was a longer than expected gestation period for its new hospitals, and competition from other private healthcare providers.

The research house, which recently met with the group’s management, said it had two key takeaways from the meeting, one of which was its ambitious hospital expansion plans.

The group plans to expand the number of hospitals it owns from 25 in 2018 to 35, by 2023.

“This implies about two new hospitals per annum, which we believe could be an ambitious target,” it said.

It noted that the management had however stressed that the target was not cast in stone and largely dependent on market conditions.

“Besides that, management also shared its plans to grow income from the medical tourism segment to sustain the group’s mid- to long-term growth plan,” it said.

KPJ’s foreign patients are mainly from Indonesia, Middle East and North Africa (Mena) nations, India and China.

Although income from foreign patients constitute for less than 5% of group revenue at the moment, KPJ is striving to expand contribution from this segment to 20% by 2022, it said.

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