• Keep BUY, and DCF-derived TP of MYR1.20, 22% upside and c.2% yield. KPJ Healthcare hosted a site visit to KPJ Damansara Specialist Hospital 2 (DSH2) yesterday. Post site visit, we are more optimistic on KPJ underpinned by returning medical tourists, rising numbers of surgeries (elective and acute cases) and improving operating efficiency as evident by the better bed occupancy rate (BOR). Our TP incorporates a 0% ESG premium and represents 28x 2023F P/E, or -0.5SD from its mean of 35x on a healthy 2023F earnings outlook of 32%.

• Establishing a differentiated proposition. Positioned as KPJ’s quaternary and flagship medical centre, DSH2 is strategically located within the matured township in Damansara. The medical facilities are equipped with state-of-the- art medical equipment as well as smart hospital infrastructure which is in line with KPJ’s Digital Transformation initiative. Infusing a luxurious design into the healthcare atmosphere, DSH2 will become an iconic symbol towards KPJ’s rebranding exercise in 2023. Apart from specialising in seven niche medical services, DSH2 will also play a crucial role in providing patient traffic to complement KPJ Damansara Specialist Hospital, particularly radiology services.

• Conduit for healthcare tourism (HT). The top notch facilities are expected to enable DSH2 to become the key driver of the group’s HT segment. Management guided for the timeline of foreign insurer (namely insurers A and G) empanelment to remain intact, which is expected to be completed by this year (typical process may need at least two years). With the onboarding of foreign insurers, KPJ expects this to increase foreign patient flow to DSH2, with expected foreign-to-local patients mix to achieve 50% from 30% currently. 2022 HT revenue is guided to achieve MYR130m, or 4% of our full year revenue estimate, vs 5.5% in 2019.

• Mid- to long-term outlook for DSH2. DSH2 began contributing to 3Q22 topline (<MYR1m) after making its debut in Sep 2022. Management expects DSH2 to achieve EBITDA positive by 2023, and profitability by 2025. Revenue intensity wise, DSH2 is expected to contribute various value added service (mostly non-medical related) as well as strive to capitalise on the 25% premium charges it accords to the healthcare tourists. The group is expected to undergo a rebranding exercise in 2023 by transforming several existing hospitals into tertiary care centres.

• Earnings revision and valuation. Our earnings adjustment remains unchanged. Maintain BUY with an unchanged TP of MYR1.20. We incorporate a 0% ESG to our intrinsic value as KPJ’s ESG score is in line with the country median. Valuation is compelling, currently trading at 25x 12 months’ forward P/E, or -0.8SD from its historical average of 35x vs the KLCI Healthcare Index’s +0.9SD.

Source: RHB Research - 11 Jan 2023