KPJ Healthcare Berhad, Malaysia’s largest private hospital operator, continues to demonstrate its resilience and growth potential in the healthcare sector. The company’s strategic expansion, cost efficiency, and strong financial performance make it a compelling investment opportunity in the region.

• Sustainable Operating Leverage: KPJ Healthcare has achieved sustainable operating leverage, driven by a consistent increase in revenue and effective cost management. In 1H24, the company reported a core profit after tax and minority interests (PATMI) of RM128.7 million, representing 50.8% of the full-year forecast. This robust performance was led by a 51.5% quarter-on-quarter growth in 2Q24 PATMI, amounting to RM77.6 million.
• Revenue Growth Through Bed Capacity Expansion: KPJ Healthcare recorded a historic quarterly revenue of RM930.6 million in 2Q24, marking a 16.4% year-on-year increase. This growth was primarily driven by a rise in bed occupancy rates (BOR) to 66% and a 7% year-on-year increase in bed capacity to 3,745 beds. Management has outlined plans to further expand bed capacity to 4,101 beds by the end of FY24 and aims to reach approximately 5,000 beds by FY28 through organic growth.
• Cost Efficiency and Margin Expansion: Despite the challenges associated with expanding capacity, KPJ managed to improve its gross profit margin by 0.4 percentage points in 2Q24. This was achieved through better procurement strategies for medical equipment and consumables, as well as a 3.8% reduction in administrative expenses due to the implementation of digital transformation initiatives.
• Positive Earnings Outlook: KPJ’s profitability is expected to improve further, supported by the positive earnings contributions from its five gestating hospitals—Damansara 2, Miri, Perlis, Bandar Dato Onn, and Batu Pahat. Notably, four of these hospitals turned earnings before interest and taxes (EBIT) positive in 1H24. The company is also seeing strong growth in health tourism, with 1H24 revenue from this segment surpassing RM130 million, up from RM190 million for the entire FY23.
• Capital Expenditure and Future Growth: KPJ has allocated approximately RM450 million in capital expenditure (capex) for FY24 to add around 400 new beds. Looking ahead, the company plans to taper its capex to RM250 million annually from FY25, focusing on adding another 900 beds by FY28. While this suggests a more conservative expansion approach, KPJ may increase capex if it pursues more aggressive expansion plans or invests in new equipment for advanced medical procedures.

Financial Performance and Valuation

KPJ’s financial performance continues to impress, with a projected revenue growth of 11.2% in FY24, reaching RM3.8 billion. The company’s operating EBITDA is expected to grow by 24.9% to RM877.1 million in the same year. KPJ’s EPS is forecasted to grow by 12% in FY24, with further improvements in the following years.

The target price of RM2.26 is based on a 30x FY25F price-to-earnings (P/E) ratio, which is above its three-year mean of 28.4x due to sustainable double-digit EPS growth expected in FY24-25. Despite the higher valuation, the company’s strong growth outlook justifies this premium.

Share Price Catalysts

• Successful Expansion of Bed Capacity: KPJ’s ability to increase its bed capacity and maintain high BOR will be crucial in driving future revenue growth.
• Improved Profitability from Gestating Hospitals: The transition of more hospitals to EBIT-positive status will support overall earnings growth.
• Growth in Health Tourism: The increasing contribution from health tourism, a high-margin segment, will further boost KPJ’s profitability.

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