We like KPJ for its strong earnings growth outlook amid robust demand for private healthcare services. This is due to the growing adoption of healthcare insurance coverage which insulates patients against rising medical costs. Upgrade to BUY (from Neutral) with a higher SOP-basedTP of MYR5.10 (21% upside). KPJ will likely miss opening targets for two hospitals but this should ease pressure on cash flow.

Insured growth. We are buoyed by KPJ Healthcare’s (KPJ) sustained earnings growth momentum in 1Q15 as we expect 17% earnings CAGR over FY14-17. The growth would be driven by higher revenue intensity and inpatient admissions, as we expect demand for private healthcare services to be robust. We believe this is backed by the rising adoption of health insurance coverage, which insulates patients from rising medical costs. This should lead to improving occupancy rates at some of KPJ’srecently-opened hospitals.

Steady expansion pipeline. KPJ has a slew of new hospital openings in the pipeline. However, management recently indicated that some of these openings are likely to be delayed , resulting in only one new opening in FY15 and FY16 respectively. Nevertheless, KPJ has a string of brownfield capacity expansion planned over these two years which is less capital-intensive and would be earnings-accretive within a shorter period of time.

Forecasts and risks. After revamping our earnings model, we mostly kept our FY15 forecasts, but raise our FY16 and FY17 earningsestimates by 7.8% and 13.9% respectively to incorporate the newcapacity at its existing hospitals as well as to reflect its updated pipeline. The downside risks to our forecasts are: i) insurers imposing higher copayment to stem overbilling, and ii) a pandemic outbreak that could dilute revenue intensity.

Investment case. On revised earnings, the stock currently trades at 28x and 14x its 12-month forward P/E and EV/EBITDA respectively. Both multiples are at a discount to its 3-year historical mean. We see no real reason for the discount as KPJ’s fundamentals have strengthened after its earnings disappointments in FY12 and FY13. Upgrade to BUY (from Neutral) with a new SOP-derived TP of MYR5.10 (from MYR4.25).

Source: RHB Research - 1 Jul 2015