KPJ is a key beneficiary of the B40HPF due to its wider geographic footprint, more localized branding and the perception that its services as cheaper to IHH in terms of inpatient/outpatient pricing. Valuations are undemanding relative to its peers whilst its smaller exposure to emerging markets should be viewed in a more positive light. Our TP implies FY19-20 EV/EBITDA of 12.6x-11.8x. Maintain our forecast and SOP based TP of RM1.27. Maintain BUY.

B40 Health Protection Fund (B40HPF). This was initially announced during Budget 2019 with a seed funding of RM2bn from Great Eastern. The fund will be managed by BNM at this juncture and aims to provide free protection for the B40 against the 4 critical illnesses and up to 14 days of hospitalization benefits starting in January 2019. In a more recent announcement, the Finance Minister was quoted saying that the fund will now cover all the 36 critical illnesses after further discussion with the insurance industry.

PPP. Public private partnerships within the hospital space already exists but is localized and limited to agreements between individual government hospitals and private hospitals in their operating vicinities. For example, we understand that an existing relationship exists between HKL and KPJ Tawakkal whereby during periods when demand for CT scans or MRI peaks and the backlog breaches a certain threshold, emergency cases from HKL will be sent to Tawakkal.

At the forefront. We are of the opinion that between the public listed hospitals in Malaysia, KPJ is at the forefront in benefitting from this B40HPF scheme by virtue of its greater geographical presence and network outside the major capital cities which is home to the B40. For example, as highlighted in our report on KPJ Rawang, KPJ virtually monopolizes the population catchment between Tanjung Malim and Rawang. Whilst in Penang its presence and dominion is the mainland (Bukit Mertajam) as opposed to competing on the Island.

Valuations. KPJ trades at a significant discount (c.50% PE and c.20% EV/EBITDA to IHH) despite exhibiting EBITDA growth of 14.5% YoY vs. IHH which only saw EBITDA growth of 5.4% YoY. We feel that KPJ’s valuations is relatively cheap and its minimal exposure to emerging markets (via Indonesia) should be viewed in a positive lights amidst all the volatilities associated with emerging markets at present.

Outlook. YTD revenue grew 4.2% YoY namely driven by higher Malaysian inpatient (+2.5%) and outpatient traffic (+2.4%) due to the ramping up of operations (KPJ Rawang, KPJ Maharani and KPJ Pasir Gudang) as well as better case mix and higher surgeries undertaken. EBITDA grew 14.5% YoY whilst margins improved by 1.3 ppts to 14.5% on better cost optimization. We can expect a seasonally stronger 4Q18.

Forecast. Unchanged.

Maintain BUY, TP: RM1.27. Maintain our SOP based TP of RM1.27 which implies FY19-20 EV/EBITDA of 12.6x-11.8x. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. We can expect a seasonally stronger 4Q18 in tandem with KPJ’s historical trend. KPJ is a key beneficiary of the B40HPF due to its wider geographic footprint, more localized branding and the perception that its services are cheaper to IHH in terms of inpatient/outpatient pricing.

Source: Hong Leong Investment Bank Research - 11 Dec 2018