• Maintain BUY and DCF-based TP of MYR1.86, 15% upside. We came away from KPJ Healthcare’s post-4Q23 results briefing with an upbeat outlook. It is set to see margins grow, underpinned by various key strategic initiatives: Central procurement, its new Hospital Information System (nHIS), and the gradual expansion towards health tourism. Our TP implies 13x 2024F EV/EBITDA, at +1SD from the 5-year historical EV/EBITDA average of 12x, and has a 0% ESG premium or discount factored in.

• A clear strategic roadmap ahead. KPJ’s growth will be cemented on key strategic initiatives such as central procurement and a digital transformation plan. On the latter, the current nHIS project deployed at Damansara Specialist Hospital (DSH) 2 is under review as the group prepares to fully roll this out across its hospital network. For this, KPJ has set aside MYR450m in capex for 2024, with >50% of this allocated for growth-driven initiatives (eg adding 350 new beds, with KPJ Kuala Selangor expected to open its doors in late 2024 or 1Q25). The recent collaboration between DSH and DSH2 with Mayo Clinic – a non-profit US academic medical centre – should elevate KPJ’s patient experience, while solidifying DSH2’s position as a centre of excellence.

• Hospitals under a gestation period. Five of its hospitals under a gestation period reported a combined PBT loss of MYR137m in 2023 (DSH2: c.MYR80m loss). DSH2’s full-year EBITDA loss was MYR23m vs MYR20m in 9M23, indicating a narrower EBITDA loss on a monthly average basis. Management indicated that DSH2’s monthly revenue grew by 20% MoM in January. Moving forward, it will emphasise on identifying various growth drivers for DSH2 (ie insurance empanelment, installation of robotic surgery, expanding the health tourism (HT) portion).

• KPJ closed 2023 with a historical high HT revenue of MYR190m (+42% YoY), which accounted for 6% of group revenue (2019: 5%). As KPJ is the largest private healthcare service provider (by number of beds) in Malaysia, its management has set an ambitious target of achieving an 18-20% market share by 2024-2025 vs 6% currently.

• Revisions to our forecasts. We maintain our earnings estimates. Our unchanged TP of MYR1.86 implies 13x EV/EBITDA, or +1SD from its 5-year historical average of 12x. 13x EV/EBITDA is on par with IHH Healthcare’s (IHH MK, BUY, TP: MYR6.90) EV/EBITDA for the past two years (IHH’s 5-year EV/EBITDA average is 16x). We still like KPJ for its key strategic direction for the road ahead, its encouraging growth in the health tourism segment, its digital transformation plan which could offer room for further margin growth, as well as the gradual improvement in its operating efficiency with hospitals currently under a gestation being expected to start contributing meaningfully to group numbers by 2024. Downside risks: Lower-than-expected patient visits and higher-than-expected operating costs.

Source: RHB Research - 21 Feb 2024