• Maintain BUY and MYR1.46 TP, 12% upside and c.3% FY24F yield. 9M23 core earnings grew 45% YoY, accounting for 61% and 64% of ours and Street’s expectations. Our DCF-derived TP implies 23x 2024F P/E, or -0.8SD from its 5-year historical average of 33x. KPJ Healthcare is currently trading at -1SD below its 5-year mean, which we deem as unjustified considering its organic capacity-driven growth story, gradual expansion towards health tourism revenue, and hospital upscaling exercise to drive growth over the longer term.

• Results overview. 3Q23 core earnings were flattish YoY. Despite 9M23 performance was below expectation, we deem this as a commendable quarter notwithstanding the high base effect in 3Q22 (post border reopened). On a sequential basis, Malaysia hospitals recorded 15% QoQ growth as 2Q23 was being dragged by Aidil Fitri festivities. On a YoY basis, Malaysia registered 15% YoY growth, aided by organic growth (12% YoY growth from inpatient visit to 93,512), better patient mix, as well as a pick-up in hospital activities (ie higher bed occupation rate or BOR) and patient visit). Management declared an interim dividend and special dividend of 1.05 sen and 0.25 sen payable on 13 Dec.

• Operating metrics and margin performance. KPJ’s total outpatient and inpatient visits recorded -3% and +13% YoY growth to 771,512 and 96,968, bringing its total patient visit to 868,480, -1.3% YoY in 3Q23. Total patient visit was higher by 12% on QoQ in the absence of the seasonal factor (observed in 2Q23). YTD surgeries surged by 12% YoY to 77,119 cases from 68,813 cases. Malaysia EBITDA margin was lower by 1.8ppts QoQ and 3ppts YoY to 22.3%.

• Earnings forecasts. We leave our earnings estimates unchanged pending the post-results briefing today.

• Valuation. Maintain BUY and DCF-derived TP of MYR1.46. Our TP implies a 23x FY24F P/E, or -0.8SD from 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 KPJ given its ample room for margin expansion (via Digital Transformation Plan), opportunity underpinned by its gradual expansion into the health tourism or HT segment, encouraging performance from its flagship Damansara Specialist Hospital 2 or DSH2 to drive growth for its quaternary care service moving forward as well as its strategic move in upscaling its existing hospitals into tertiary care centres enabling KPJ to tap into more complex and uncommon procedures.

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

Source: RHB Securities Research - 29 Nov 2023