• Maintain BUY and MYR2.12 TP, 6% upside. KPJ Healthcare reported 1Q24 core earnings of MYR51m, down by 6% YoY and accounting for 17% and 18% of our and Street’s expectations – we deem this as in line, as we expect stronger quarters ahead. Hospitals under gestation continue to deliver robust improvements in operating metrics on top of narrowing losses. Our DCF-derived TP represents 15x 2024F EV/EBITDA or 2SD above its 5-year historical EV/EBITDA average of 12x. We incorporate a 0% ESG premium/discount given KPJ’s 3.0 ESG score.

• Results overview. 1Q24 core profit slipped 39% QoQ due to a seasonally weaker quarter. We deem the results as in line, as we expect stronger quarters ahead – underpinned by improved operating efficiency of hospitals under gestation, robust patient traffic growth, and pick-up in foreign patient visits. Revenue grew 11% on a better patient mix, ie inpatient and outpatient visits booked +3.4% and -2.1% YoY growth. Damansara Specialist Hospital 2 showed significant improvement, with LBITDA narrowing to MYR0.6m from of MYR10m a year ago (LBT narrowed to MYR12-14m from c.MYR20m previously). During the quarter, KPJ registered provisional extinguishment of net liabilities amounting to MYR43.3m as a result of the disposal of the aged care business in Australia. This figure was excluded at core profit level (MYR25m after adjusting for its 57% stake in Jeta Garden). The board has declared an interim dividend of MYR0.01, up from 0.6 sen in 1Q23.

• Operating metrics and margin. KPJ’s outpatient and inpatient visits were lowered by 6% and 4% QoQ to 717,648 and 91,039, bringing total patient visits to 808,687 (-5.7% QoQ) on the back of a seasonally weaker quarter. The bed occupancy rate (BOR) was lowered 4ppts QoQ (lowered 5ppts YoY) to 65% on the opening of new beds (+50 QoQ, +277 YoY). Correspondingly, Malaysia operations’ EBITDA margin was lower by 1.6ppts QoQ to 21.2%, likely driven by higher opex in relation to the opening of new beds.

• Earnings revision. Post result, we keep our earnings estimate unchanged pending an analysts briefings today.

• Valuation. Maintain BUY and MYR2.12 TP (DCF), which implies 15x 2024F EV/EBITDA or 2SD above its 5-year historical average of 12x. Our basis of premium valuation on KPJ is premised on the group’s solid turnaround storey, which offers: i) Room for margins improvement from hospitals under gestation period, ii) potential opportunity to be unlocked via expansion into the health tourism segment, and iii) a strategic move in upscaling an existing hospital into tertiary care centre – enabling 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 Research - 28 May 2024