KPJ Healthcare Berhad

BUY: RM1.15 (+27.8%)

Equity Research Department
Analysts
Lee Xiao Ying
Lead Analyst, Equity Research
lee.xiaoying@u.nus.edu
Tommy Tan
Analyst, Equity Research
tommy.tan@u.nus.edu
Ngoi Kai Han
Analyst, Equity Research
e0175977@u.nus.edu
James Chua
Analyst, Equity Research
jameschua@u.nus.edu
Manan Mittal
Analyst, Equity Research
e0222652@u.nus.edu
Basic Information
Last Closed Price
12M Target Price
+/- Potential
Bloomberg Ticker
GICS Sector
GICS Sub-Industry
1Y Price v Relative Index
7 December 2017
Rising Demand for Healthcare
We are initiating coverage of KPJ Healthcare Berhad with a Buy rating
and a RM1.15price target.
3Q17 Earnings Review
• Total revenue was up by 5% for 3Q17, and revenue for 9M17 was
also up by 5%.
• Revenue from the Indonesian segment reported the largest
percentage increase of 15%.
• Operating profit for 3Q17 increased by 2% y-o-y, to RM 53.2m.
• Net profit attributable to shareholders for 3Q17 declined by 6% to
RM 30.6m, mainly due to an increase in tax expense of 16% y-o-y.
Investment Thesis
• Aggressive expansion into local markets through increasing bed
MYR 0.90 capacity for existing hospitals see sustainable organic growth that
MYR 1.15 will likely drive sales; optimistic outlook for specialist healthcare
+27.8% expansion projects in various states of Malaysia and in its regional
KPJ MK footprints, in which the former is expected to increase local
Healthcare healthcare market share from 23% to an estimate of 30% as it
Healthcare Facilities and meets growing demand for private hospitals
Services • Margin expansions align with blooming healthcare sector
sentiments, as KPJ is able to efficiently manage costs through
tapping on technology services that encourages cross-sharing, as
well as consolidation between hospitals
• Medical tourism growth expectations are positive, with 6%
increase on 3Q17 YoY comparison; forefront leader of specialist
healthcare services in Malaysia remains KPJ’s competitive
advantage for medical tourist to opt for their chain of hospitals

Catalysts
• On 23 September 2016, KPJ signed an agreement to collaborate
Company Description with Sebarun Hospital from Korea to set up a Minimal Invasive
KPJ Healthcare Berhad is a leading provider of private Surgery (MIS). Spine Accreditation continues to be their aim in
healthcare services in Malaysia. Since KPJ started its meeting the demand by their patients for quality healthcare. As at
first private specialist hospital in Johor in 1981. Today March 2017, KPJ has 18 MSQH-accredited hospitals and 4 JCI-
they have 2,929 beds across a total of 32 hospitals,
accredited hospitals.
retirement & aged care centres in Malaysia, Indonesia
and Australia. • Besides KWAN and HWAN, KPJ had participated in various other
community services. They have also contributed more than RM1
Key Financials million in terms of cash donations to other parties, including to the
Market Cap 3.797B
‘asnaf’ category and public community programmes for
Basic Shares O/S 4.28B
Free Float 1.82B underprivileged children.
52-Wk High-Low MYR 0.90 – 1.15 • Although, looking ahead we foresee a very challenging fiscal year in
(MYR M) FY15A FY16A FY17E FY18E 2018. The global uncertainty, both from the political and economic
Revenue 2847 3021 3242 3643 aspect, should not be lightly brushed aside. Innovation and
Gr Rate (%) 7.9 6.1 7.3 12.4 technology remains the key to improvement and betterment of KPJ
EBITDA 359 417 415 445 performance. Improving the customer service and strengthening
Margin (%) 7.7 8.1 8.0 8.0 the KPJ branding will also be the focus in 2017. All these will sum
Net Income 145 156 173 191
up to efficient quality care to the patients.
Margin (%) 5.1 5.2 5.3 5.2
ROA 3.7 4.0 4.4 4.8 • Malaysia has the ecosystem and infrastructure to provide quality
ROE 9.3 9.3 9.7 10.1 end-to-end healthcare system and services that are globally
EV/EBITDA 14.9 13.2 13.2 12.1 competitive. Last year, over 860,000 medical travellers sought
P/E Ratio 32 34.1 21.3 22.6 treatment in the country. The number was expected to grow, with
D/A Ratio 39 40 35 30 more private hospitals able to cater to more foreign patients.
Key Executives • With a weaker ringgit, medical tourism is expected to increase. KPJ
Kamaruzzaman Chairman could highly benefit if it takes the first mover advantage.
Abu Kassim

Figure 1. Revenue by Geography, 4Q16
Source: KPJ’s website
Figure 2. USD/MYR
Source: xe.com
Figure 3. KPJ’s Shareholding profile
Source: KPJ’s website
Valuations
Our 12-month price target from date of coverage is RM1.15, representing
a P/E of our FY18 estimates. This reflects a 15% upside to KPJ’s last
traded price of RM0.92. In our view, this target price is appropriate,
given Malaysia’s growing medical tourism industry and the positive
macroeconomic outlook.
Investment Risks
• Delays and longer than expected gestation from expansion of
hospitals. Though we are upbeat on KPJ’s growth prospects
supported by its ongoing projects, we remain cautious on possible
delays or hurdles in project executions and longer-than-expected
gestation period of new hospitals. New projects in the pipeline
include KPJ Perlis, which should open in December this year.
Greenfield projects include KPJ Bandar Dato' Onn and KPJ Miri, both
scheduled to open in mid-2018.
• Impact on margins from the weaker Ringgit and assuming no
pass through via higher ASPs high net gearing levels, which result in
equity raising over the medium to longer term. Drug and medicals
costs and price revisions will likely be forthcoming by year end
owing to the weakened ringgit. However, KPJ said this will be
implemented delicately due to the potential impact on patient
volume.
• Cost escalation for technology, processes and equipment is another
concern, resulting in rising overall cost for healthcare. At the same
time, insurance companies are negotiating for bigger discounts as
they gain more bargaining power. In this respect, KPJ hopes to
minimize the impact with economies of scale gained through its
expanding network.
• Shortage of healthcare professionals in Malaysia. There is
significant evidence indicating the existence of a worldwide
shortage of healthcare professionals. The problem is more severe in
middle and low-income countries, like Malaysia. A contributing
factor is the drop in National Higher Education Fund Corporation
(PTPTN) loans for students. Moreover, poaching from affluent
neighbours like Singapore, compounds the problem. It is important
for us to see how the company develops a compensation package to
attract professionals.
Company Overview
KPJ Healthcare Berhad “KPJ” is a leading provider of private healthcare
services in Malaysia. Since KPJ started its first private specialist hospital
in Johor in 1981, it has been at the forefront of the healthcare industry.
KPJ operates 2,929 beds across a total of 32 hospitals, retirement & aged
care centres in Malaysia, Indonesia and Australia. KPJ’s network of
hospitals provides a variety of specialist services with niche in
orthopaedic care, oncology, bariatric, cardiology and reconstructive &
plastic surgery.
KPJ prides their high-quality services with the adoption of technologies
like cloud computing to improve assessments of patient information in
real-time, and recognition by accreditation bodies such as the Malaysian
Society for Quality in Health (MSQH) and the Joint Commission
International (JCI) as a testament to their services.
Their Malaysian operations make up most of the group’s revenue at 94%,
while the Indonesia, Australia and other operating segments contribute
about 2% revenue each.
In May 2016, KPJ Pahang Specialist Hospital opened its doors, which
marks the 26th hospital in the network. KPJ is currently undergoing
multiple expansion projects, including 7 hospitals over the next 4 years,
and 6 other existing hospital expansions seeing completion by FY18.
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Figure 4. KPJ’s Pahang Specialist Hospital
Source: KPJ Annual Report
Figure 5. Cost of Medical Procedures
Source: Frost & Sullivan
Figure 6. KPJ’s Marketing Strategies
Source: KPJ Annual Report
3Q17 Earnings Review
• The Group's revenue for the current quarter ended 30
September 2017 was RM803.2 million, an increase of 5% as
compared to RM767.0 million in the corresponding quarter of
the preceding year. The Malaysia segment saw a revenue
increase of 5% due to increasing inpatient numbers, while the
Indonesian segment reported an increase of 15% on the back of
economies of scale with the higher number of outpatients.
• Looking forward, the Group is confident that the revenue from
the matured and new hospitals will continue to improve in
tandem with more new hospitals completing their gestation
period. Management sees rising demand and positive economic
outlook in overseas segments, along with continuation of
expansion in its bed capacity and services.
Industry Outlook
Growth in purchasing power to spur growth in private sector
The healthcare industry in the Asia-Pacific region remains one of the
fastest growing regions globally with a growth rate of 8 percent this year,
even as the global growth rate is only pegged at 4.8 percent. Within
Malaysia, household spending is set to grow at a CAGR of 5.3% for the
next five years will private healthcare insurance has been growing at a
rate of 6.6% YoY. Furthermore, there is a relative shortfall of hospital
beds in Malaysia, 30% less than the worldwide ratio median, leaving
much room for the sector to grow.
Medical Tourism to heighten industry’s potential
Under Malaysia’s 12 National Key Economic Areas (NKEAs), healthcare
tourism is estimated to generate RM9.6 billion in revenue and RM4.3
billion in gross national income, and will create 5,300 jobs by 2020. In
2016 alone, 882,000 medical tourism travellers visited Malaysia and
some 1.9 million foreign patients are expected to visit annually by 2020.
For KPJ, with its 26 specialist hospitals in Malaysia, it has great growth
potential in this area, with the current percentage of foreign patients at
less than 10%.
Weak ringgit has differing effects on health care service providers
The relative weakness of the ringgit has increased the cost of medical
drugs and equipment, putting temporal pressure on the medical
industry in Malaysia by increasing the cost of operation. However, it also
has a positive effect for hospitals that cater to many foreign patients, who
are attracted by the weak ringgit to carry out their procedures in the
country.
Investment Thesis
1. Organic growth of 4.1% YoY in revenue 3Q17 will be sustained
with KPJ’s aggressive expansionary development
• KPJ is well situated to capture the excessive demand for public
hospitals with its services due to favourable macro indicators of
growing middle class of Malaysians and medical insurance,
which will propel patients transitions from public to private
healthcare
• Public hospitals are facing concerns over growing demand, as
patient to bed ratio sits at 1.85: 1000 patients as at 2016, well
below international standard of 2.5:1000. At 66% capacity
utilisation, KPJ has outlined capacity expansion plans (Fig x) in
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 Malaysia to capture the local market share of healthcare, which
is currently sitting at 23%

Figure 7: KPJ’s Expansion Plans

• Growth in existing healthcare facilities from other segments
overseas are increasing, as KPJ rides on the tailwind of rising
demand for high-quality healthcare services. Plans to expand in
overseas segments to increase revenue contributions are well
underway, with notable tri-partite collaboration (MOU) with
Sojitz Corporation and Capital Medica Co. Ltd. of Japan, for a
proposed USD12 million oncology centre at Rumah Sakit
Medika Bumi Serpong Damai (RSMBSD). We see collaboration
with healthcare service providers from countries like Japan, as
a reputation for boost and acknowledgement of KPJ as a top
quality recognised healthcare provider.

2. Efficient cost management remains a priority for KPJ, leading to

EBITDA margin expansions of 13.8% to 14.1% in 2016 YoY

• Leveraging on technology innovation by New Products and

Services unit in KPJ’s hospital and operations systems will look
to drive revenue through state-of-the-art healthcare services
and more effective capital expenditure as well as financial
efficiency.
• Current ventures include KPJ’s retail pharmacy which provides
online services to consumers. KPJ is also in talks with IBM to
acquire its Watson technology, which will boost its oncology
specialist services as Watson technology can analyse and
interpret data similarly to that of a human thought process.
Breakthrough research and testing in the area of 3D printing for
maxillofacial patients are currently underway, which will look
to propel more patients to private healthcare to receive latest
medical treatments.
• Adoption of cloud computing and Lablink On The Go has
allowed KPJ to achieve consolidation of hospitals, with the most
recent adoption by KPJ Puteri, Seremban and Penang. Patients
can easily access cross-referrals among hospitals, while doctors
are able to access patient records anywhere, reducing wait
times and increasing more timely diagnosis.

3. Potential for medical tourism growth remains optimistic

• KPJ looks to target a 10% revenue stream from foreign medical

patients by 2020 through aggressive marketing and branding
tactics, and retaining its competitive advantage of being the first
to bring in cutting edge technologies.
• As of 2016, KPJ recorded over RM124.2 million an increment of
8% in revenue with 155,052 visits by foreign patients compared
to 140,231 visits during the previous year. KPJ’s expanding
Source: KPJ’s website medical facilities and upcoming collaborations are well suited to
sustain its competitive advantage as the leader in the latest
technology services.
• Pahang – KPJ Pahang Specialist Hospital in Tanjung Lumpur, has
been lauded with the opening of the resort-like 11-storey
hospital with sea fronting views, comprehensive facilities,
world-class equipment with focus in Cardiac treatments,
Hematology, Orthopedic, etc. It is also the first and only private
hospital to offer full cardio checkup plus angiogram and
angioplasty support.
• KPJ in Johor is has signed an MOU with leading Korean private
medical centre, DK Medical Centre, to provide plastic and
reconstructive surgery services. This will increase KPJ’s
healthcare services coverage in the area of cosmetic services,
which will look to attract medical tourists from countries that
have significant language barriers to KPJ Johor.

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Figure 8: Medical Tourism Growth

• Under the public sector private partnership with Tuvalu’s

Ministry of Health, KPJ has managed to capture a new target
market, Tuvalu region. Under the Tuvalu Medical Treatment
Scheme (TMTS), Tuvaluan patients are now increasingly
referred to KPJ in Malaysia and this win-win collaboration for
Tuvaluan patients in face of rising costs of treatments to
countries like Australia, New Zealand will boost KPJ’s medical
tourism revenues.
• Strategic marketing efforts to increase the brand awareness and
accessibility of KPJ to targeted groups of consumers will see
more patients familiar with the services of KPJ. Notably,
collaborations with airlines for inflight advertising to its
targeted neighboring countries, as well as reduction of language
Source: KPJ’s website barriers on its website will likely see a significant increase in
sales revenue for KPJ through brand recall.

Figure 9: KPJ Financial Analysis Financial Analysis

Overview

• Based on KPJ’s recent performance for FY16, we see that their

current financial position is relatively stable amidst the ongoing
expansion activities.
• Debt ratios show their financial position is healthy to continue
servicing their debt.

Profitability Ratios

• KPJ’s profit margins has been relatively steady over the past
Source: NUS Investment Society Estimates
year, and is expected to increase in the future as hospitals
increase their capacity. The expected gestation period for new
hospitals is 3-5 years.
• We believe the hospital extensions will allow KPJ to have greater
economies of scale, as operating expenses mainly come from the
Figure 10: KPJ Borrowings
pay of medical professionals.
• With multiple hospital expansion plans seeing completion
coming FY18, we expect growth to pick up and see an expansion
of margins as costs grow at a slower rate than revenues.

Financial Leverage

• Most of KPJ’s borrowings are due after a period of 5 years: we

see that expansion of hospitals will bring in the revenue for KPJ
to meet their future debt obligations.
• The current ratio suggests KPJ will be able to meet their short-
term borrowings. The servicing of future obligations will need
to be monitored with the performance of latest expansion
projects.
• KPJ is in a good position to cover their interest payments. We
see that most of the borrowings follows a fixed financing rates
of less than 6%, interest payments will be stable.

Source: KPJ Annual Report

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Figure 11: Valuation Summary
Source: KPJ website, NUS Investment Society
Estimates
Figure 12. Sensitivity Table
Source: NUS Investment Society Estimates
Valuations
Valuation Price Target: $1.15
DCF Model
A discounted cash flow analysis was used to estimate intrinsic value of
KPJ’s share price, analysing its cash flow generating capabilities. The
primary model is forecasted over 5 years due to relative unpredictability
of KPJ’s capital expenditures. The model is driven by organic growth
from increased demand of KPJ’s healthcare services, from its operating
segments in Malaysia, Indonesia and Australia. On the cost front, we
expect operating efficiency to increase, resulting in cost savings. Which
improves net profit margins. Our model consisted guidance from
historical performance, annual reports, macroeconomic factors and the
outlook of the medical sector outlook. The DCF is most sensitive to the
following factors, derivation of which are explained below.
Weighted Average Cost of Capital (WACC)
We used a Weighted Average Cost of Capital of 5.4%, which was obtained
from Bloomberg figures. The WACC was calculated by taking into
account Malaysia’s risk-free rate, equity risk premium, and KPJ’s beta
relative to the KLCI.
Revenue Growth
Revenue growth for KPJ is expected to be driven by organic growth from
improving patient loads as well as from its expansion plans. We estimate
a 5-year CAGR of 11%.
Terminal Growth
As the industry becomes increasingly competitive and more markets
hitting saturation point, UA’s growth rate will definitely slow down. This
rate will reach a terminal growth rate of 3%, accounted for in the DCF
model.
Relative Valuation
Using P/E and EV/EBITDA, KPJ is moderately priced relative to other
healthcare service providers in the region. Given the positive
macroeconomic factors and the increasing demand for healthcare, we
are optimistic about the outlooks of KPJ to grow its revenue and increase
its cashflow. Using comparables as benchmarks, we believe that our
valuation of KPJ is justified.
This analysis leads to an intrinsic value of RM 1.15 for KPJ, a 27.8 %
upside potential from the current trading price. We remain confident
that this valuation reaffirms our Buy recommendation and validates our
view of upcoming 12-month period.
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© 2016 NUS Investment Society

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Appendix:
Financial Ratios

Pro Forma Financial Statements

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8
9
 Valuation

Peer Comparisons & Valuation Summary

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