• Still BUY, new MYR1.46 TP (DCF) from MYR1.50, 24% upside and c.3% FY23F yield. We came away feeling upbeat on KPJ Healthcare post the 1Q23 result briefings. Its key transformation plan, coupled with encouraging performances from Damansara Specialist Hospital 2 (DSH2), could render support to revenue intensity and patients volume growth in the near term. Our TP incorporates a 0% ESG premium/discount and represents 26x 2023F P/E, 0.5SD below its pre-COVID-19 5-year historical mean of 28x.

• Positive development on DSH2. DSH2’s LAT narrowed QoQ to MYR22m (4Q22: -MYR25m). Monthly average revenue was said to have achieved c.MYR3m/month vs MYR1m when DSH2 debuted. Bed occupancy rate (BOR) for 1Q23 was 34% vs full-year 2022’s 38%. The empanelment of AIA has come into fruition recently and we believe this could offer further room for growth in BOR and drive foreign patients growth. KPJ maintained its target for DSH2 to achieve EBITDA breakeven by 2023, underpinned by the gradual improvement in operating efficiency.

• 1Q23 healthcare tourism (HT) more than doubled to MYR42.5m, making up 5.1% of revenue for this period. The robust performance was mainly on the return of affluent Indonesian customers. DSH2 is set to serve as a perfect conduit to drive the long-term HT revenue contribution aim of 20- 30%. KPJ is also actively deepening its regional channel partner collaborations and expanding footprints within secondary markets like ASEAN and Middle East-North Africa to attract HT visitors to Malaysia.

• Near-term outlook. Apart from DSH2, KPJ Perlis and KPJ Miri are also in the red at EBITDA level, albeit narrower QoQ (4Q22 LBITDA: -MYR3m) driven by pick-ups in patient footfall. The newly opened Ambulatory Care Centres in Ipoh and Klang Valley are expected to drive outpatient growth while addressing the overcrowding issue in public hospitals. Moving forward, blended revenue intensity could potentially normalise, but this should be offset by positive contributions from the return of medical tourists and KPJ’s transformation plan (to offer more tertiary care services). We expect the group to sustain its earnings growth momentum ahead, anchored by operating efficiency improvements (with new hospitals nearing the end of their gestation) and gradual increase in HT contributions.

• Earnings revision and valuation. Post the briefing, we lower our 2023F- 2024F earnings by 8-7% to account for costs associated with DSH2 and higher utility costs at existing hospitals. Maintain BUY with a lower TP of MYR1.46. We incorporate a 0% ESG premium/discount to our intrinsic value as KPJ’s ESG score is in line with the country median. We like the group for: i) Its healthy organic patients growth, ii) being less susceptible to nursing shortages, and iii) the encouraging performance from its flagship DSH2 to drive HT division growth moving forward.

Source: RHB Research - 1 Jun 2023