• We remain bullish on KPJ’s long term growth in line with DSH2  that will be one of the main contributors to the group’s medical  tourism revenue. The group project circa 50% of patients to come from foreigners while laid out ambitious plan for the expansion of DSH2 in 2023-2025 (refer Table 1).

• We revised up our FY23-24F earnings forecasts by 12.8%-12.1% respectively, after factoring new assumptions on (i) bed occupancy rate, (ii) recovery in number of outpatients &  outpatients and (iii) increasing trend of health tourism.

• Maintain a BUY call on KPJ with a higher target price of RM1.36  (RM1.08 previously) following earnings upgrade. Our valuation is derived based on sum-of-part (SOP) valuation with a WACC of  8.1% and a long-term growth of 1.5%.

Foresee solid improvement in hospital activities

KPJ’s future growth is expected be propelled by the revitalization of international medical tourism. Note that KPJ has adopted a more aggressive strategy in FY21 to cope with demand from foreign patients. To recap, Malaysian government is targeting hospital revenues (medical receipts only) from medical tourism to hit RM1.3bn in 2023, RM1.7bn in 2024 and RM2bn in 2025 respectively. With the reopening of China’s international border, we foresee significant improvement for KPJ health tourism revenue in FY23 given that China is one of the biggest contributors to KPJ’s medical tourism during pre-pandemic. It is worthwhile to note that KPJ health tourism revenue improved significantly or by 63% YoY to RM134mn in FY22 (versus FY21: RM82mn). The largest contributor was Indonesia which accounted 79%-share followed by Singapore (2%) and India (2%). Aside to that KPJ announced that the group has entered into a share sale agreement (SSA) at the end of January 2023 to divest its entire equity stake in PT Al-Aqar Permata Hijau and 80% stake in PT Khidmat  Perawatan Jasa Medika. Note that this is part of KPJ strategic plan to place greater focus on the group’s core Malaysian segment. The divestment plan was slated to be completed within the next 12 months. We are positive on this divestment as it may help KPJ to re-strategies its Malaysian operations particularly when this is the group’s main earnings generator.

In regards with KPJ new Damansara Specialist Hospital 2 (DSH2), KPJ  29th hospital, we remain bullish on its long term growth powered by its modern surgical equipment as well as competitive advantage. To recap, KPJ has positioned DSH2 as the group’s flagship hospital in Malaysia. It also foresees circa 50% of patients to come from foreigners, consistent with DSH2 ambitious expansion plan for 2023- 2025 (refer Table 1).

Source: BIMB Securities Research - 21 Feb 2023