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KPJ: Healthcare earnings fairly resilient

KPJ Healthcare Bhd (KPJ) is the country’s leading provider of private healthcare services.


KPJ Healthcare Bhd (KPJ) is the country’s leading provider of private healthcare services.

The company opened its first hospital in 1981 in Johor Bahru. It has since grown through the acquisition of existing hospitals as well as developing new greenfield projects.

Today, the company manages 20 hospitals in Malaysia 10 of which are accredited by the Malaysian Society for Quality in Health (MSQH) and two in Indonesia.

KPJ is estimated to have a 24% share of the private healthcare services market and is sanguine on its future prospects.

The healthcare industry is widely viewed as relatively recession proof.

Nevertheless, KPJ’s stock did not go unscathed in the recent global equity rout. Its share price fell off a recent peak of RM4.72 to a low of RM3.76 before bouncing back to the current RM4.14.

We do not discount further downside risks if sentiment for equities deteriorates further. Even after the recent selldown, the stock is trading at roughly 20.1 times our estimated earnings for 2011 and 18.3 for 2012 and fully diluted price earnings ratios of 22.4 and 20.5 times based on its enlarged share capital of 659.5 million shares.

That is higher than the broader market’s prevailing average valuations.

We suspect the premium has justifications, given the company’s relatively defensive business as well as its positive longer-term growth prospects. Thus, even though gains in the near-term may be capped, we believe KPJ will yield positive returns in the long run.

Based on the expected industry growth and KPJ’s own expansion plans, revenue growth is forecast to remain in the double-digit range over the next few years. The company’s revenue expanded at an average compound annual growth rate of 18.8% between 2006 and 2010.

KPJ does not have a fixed dividend policy. Net dividends totalled 11.25 sen per share in 2010, equivalent to 52% of net profit. Assuming a 50% earnings payout going forward, dividends will total 10.3 and 11.3 sen per share for 2011/12.

That translates into a net yield of about 2.5% to 2.7% at the prevailing share price.

Demand for healthcare services healthcare expenditure is still a relatively low 4.7% of GDP is expected to trend steadily higher for the foreseeable future.

Some of the main drivers for demand growth include greater affluence and the rise in lifestyle related illnesses, growing awareness of and improved access to quality care and longer life spans and an ageing population.

The increasing global interconnectivity also translates into a faster and wider spread of infectious diseases, resulting in more frequent epidemics and potential pandemics.

With the expected rise in demand for healthcare services, it is envisioned that the additional burden on the public healthcare system will gradually drive more demand towards the private sector. As it is, the patient-to-doctor ratio in the public sector is now well over two times that of the private sector. Additionally, the number of medical specialists in the country is heavily biased towards the latter.

Increasing awareness and adoption of medical insurance by the population, including the younger generation, will help aid the switch.

Industry statistics show that the health insurance sector has been growing at a double digit pace annually. Coupled with the expected increase in per capita income, private healthcare will become more affordable.

Medical tourism is another potential key driver for long-term growth. Indeed, the government has identified the sector as one of the National Key Economic Areas.

The majority of Malaysia’s medical tourists come from Indonesia, due to our higher quality of healthcare services. Patients from richer countries such as Singapore, Japan and the Middle East are also attracted to the lower prices for treatments compared with those offered in the US, Europe and Australia.

As at end-2010, KPJ had served 12,000 health tourists who provided almost RM25 million in revenue.

The company intends to grow this segment by boosting its marketing efforts overseas and upgrading and investing in new technology and innovative services as well as gaining accreditations for its network of hospitals.

We will continue with KPJ’s strategy for growth in the second part of this article on Friday.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgement or seek professional advice for your specific in investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.