• Keep BUY, with new DCF-derived TP of MYR1.20 from MYR1.03, 23% upside and c.2% FY23F yield. We remain upbeat on KPJ Healthcare post 3Q22 earnings briefing. Growth outlook is underpinned by returning medical tourists, increase in the numbers of surgeries (elective and acute cases) and improved operating efficiency as evident by the better bed occupancy rate (BOR). Our TP incorporates a 0% ESG premium and represents 28x 2023F P/E, or -0.5SD from its mean of 35x on healthy 2023F earnings outlook of 32%.

• Health tourism (HT). 9M22 HT revenue recorded stellar growth of 53% to MYR93.1m, accounting for 4.3% of 9M22 group total revenue. Moreover, HT revenue accounted for 62% of 2019’s HT revenue of MYR150.3m despite the movement restriction order in 1Q22. Moving forward, KPJ will continue to deepen its channel partner collaboration and embark on insurance empanelment to further drive the HT segment. It is understood that the group aims to allocate 50% of the bed capacity of the Damansara Specialist Hospital 2 (DSH2) for medical tourists.

• Update on DSH2. DSH2 has begun to contribute to 3Q22 topline (<MYR1m) after making its debut in September. While breaking even (to achieve EBITDA positive) may take at least three years, KPJ has laid out its 3-year plan with several complex surgical procedures in the pipeline to boost its revenue intensity and cater to patients’ needs for more acute surgery cases. The group has also embarked on foreign insurance empanelment to tap into the pick-up in demand from medical tourists.

• Jeta Garden. Management attributed the lower BOR to the spike of COVID- 19 cases at Jeta Garden, resulting in its aged care residents needing to vacate the premises for preventive measures during the quarter. Nonetheless, the issue was brought under control moving into 4Q22 as daily confirmed cases have subsided. The target timeline for divestment of Jeta Garden remains unchanged – it is expected to be completed by end-2023.

• Earnings revision. Post briefing, we raise our 2022F-2023F earnings by 12- 8% to account for better-than-expected patient volume. We lower our revenue intensity assumptions as we expect KPJ’s target to boost its patient volume by accepting more elective cases would spell a relatively lower blended ASP in the near term.

• Valuation. Maintain BUY with a higher TP of MYR1.20 from MYR1.03. We incorporate a 0% ESG to our intrinsic value as KPJ’s ESG score is in line with the country median. Valuation is compelling, currently trading at 25x 12 months’ forward P/E, or -0.8SD from its historical average of 35x vs the KLCI Healthcare Index’s +0.6SD.

Source: RHB Research - 29 Nov 2022