• Keep BUY and MYR1.46 TP, 25% upside. 2Q23 core profit surged 61% YoY, bringing KPJ Healthcare’s 1H23 core earnings to account for 40% and 43% of our and Street’s expectations. Our DCF-derived TP represents 18x 2024F P/E, 0.8SD below its 5 year historical average of 33x. KPJ is now trading at -1SD below its 5-year mean, which we deem unjustified, given its organic domestic expansion, gradual pick-up in health tourism revenue, and divestment of loss-making foreign assets.

• Results overview. 1H23 core earnings grew 89% YoY to MYR96m, accounting for 40% and 43% of our and Street’s estimates. We deem this result below expectations, given the sequential weaker revenue (-4% QoQ) likely attributed to the Adil Fitri festivities. On a YoY basis, KPJ’s core market segment saw Malaysia operations registering 14% YoY growth. This was aided by organic growth, ie 5% additional beds (mainly contributed by KPJ Batu Pahat, KPJ Penang, and KPJ Bandar Dato Onn) that were added during the quarter as well as a pick-up in hospital activities, ie higher bed occupancy rates or BORs and patient visits. The board declared an interim dividend of 0.8 sen payable on 3 Oct.

• Operating metrics and margins performance. KPJ’s total outpatient and inpatient visits posted -5% and +14% YoY growth to 690,499 and 82,479, bringing total patients visits to 772,978 (-3.5% YoY) in 2Q23. This came off from 2Q22’s high base and seasonality, ie the higher number public holidays observed in 2Q23. Nevertheless, the stronger inpatient visits were mainly driven by its Malaysia operations, which saw inpatient visits growing by 13% YoY. Australia operations’ LBITDA widened YoY to MYR7.1m vs a prior MYR3.7m loss on higher depreciation charges. Malaysia operations’ EBITDA margin improved 1.2ppts YoY (+2.6ppts QoQ) to 25.4%, likely driven by improved operating efficiencies from newly launched hospitals.

• Earnings revision. We leave our earnings estimates unchanged pending KPJ’s post-results briefing today.

• Valuation. Maintain BUY and DCF-based TP of MYR1.46. Our TP implies 23x FY24F P/E, which is 0.8SD below its historical average of 33x. We incorporate a 0% ESG premium/discount to our intrinsic value, as KPJ’s ESG score is in line with the country median. We still like the group for its ample growth opportunities – underpinned by its gradual expansion into the health tourism segment, encouraging performance from the flagship Damansara Specialist Hospital 2 to drive growth for its quaternary care services moving forward, and strategic move to upscale existing hospitals into tertiary care centres, which enables KPJ to tap into more complex and uncommon procedures.

• Key downside risks: Lower-than-expected patient visits/revenue intensity growth, and higher-than-expected operating costs.

Source: RHB Securities Research - 30 Aug 2023