• Maintain BUY with higher MYR1.86 TP from MYR1.66, 14% upside. KPJ Healthcare delivered 2023 core earnings of MYR289m, 27% and 24% above ours and Street’s expectations. Despite the recent share price rally, we think KPJ still has room to grow, underpinned by its strategic upscaling exercise and space to scale operating efficiency from hospitals under gestation period. Our DCF-derived TP represents 13x 2024F EV/EBITDA, 1SD above its 5-year historical EV/EBITDA average of 12x (narrowing its EV/EBITDA valuation gap against IHH Healthcare (IHH MK, BUY, TP: MYR6.90).

• Results overview. KPJ’s 4Q23 core earnings spiked 71% YoY, thanks to better patient mix, improvement in hospital activities, and higher revenue generated from hospitals – namely KPJ Penang, KPJ Puteri, and DSH2 (Damansara Specialist 2). During the quarter, KPJ registered impairment losses on property, plant, and equipment (PPE) from Jeta Garden’s aged-care business (classified under discontinued operations in profit or loss) amounting to MYR16.8m as well as MYR7.6m on the retirement village business’s investment property in Australia. Both figures were excluded at core profit level. On a sequential basis, revenue was softer 2% QoQ owing to seasonality effects. The board declared an interim dividend of 1 sen, bringing its full-year dividend payment to 3.05 sen.

• Operating metrics and margin performance. KPJ’s total outpatient and inpatient visits recorded +4% and +13% YoY growth to 763,033 and 94,504, bringing its total patient visits to 857,537, +5% YoY in 4Q23. During the quarter, surgery cases were higher 6% YoY on top of an extended period of inpatient days. Malaysia EBITDA margin was lower by 5ppt QoQ due to impairment loss on PPE.

• Earnings revision. Post result, we lift our FY24-25 earnings estimate 10% and 9%, underpinned by robust patient volume growth and better patient-case mix.

• Valuation. Maintain BUY with a higher DCF-target price of MYR1.86. Our TP implies 13x 2024F EV/EBITDA, 1SD above its 5-year historical average of 12x. The 13x EV/EBITDA level is on par against IHH’s traded EV/EBITDA for the past two years (IHH’s 5-year EV/EBITDA average is 16x). Despite KPJ’s recent share price rally, we still see ample room for growth – from the potential opportunities generated by its gradual expansion into health tourism (HT) segment, strategic move in upscaling existing hospitals into tertiary care centres (enabling KPJ to tap into more complex and uncommon procedures), and room for margin improvement from hospitals under gestation period. We incorporate 0% ESG to our intrinsic value as its ESG score is in line with the country median. Key downside risks: Lower-than-expected patient visits and revenue intensity growth, and higher-than-expected operating costs.

Source: RHB Research - 19 Feb 2024