• Keep BUY and MYR1.50 TP, 34% upside, c.3% yield. KPJ Healthcare’s 1Q23 core earnings jumped 122% YoY, coming in below our estimates but in line with Street’s. Our DCF-derived TP represents 25x 2023F P/E, at 0.8SD below its pre-pandemic 5-year historical average of 28x. KPJ is now trading at -2SD below its pre-pandemic 5-year mean – which we think is unjustified, considering its local organic expansion, the gradual pick-up in health tourism revenue, and divestment of its loss-making foreign division.

• Results overview. 1Q23 core earnings more than doubled to MYR52m – at 20% and 25% of our and Street’s estimates. We deem the results as below expectations, despite KPJ’s revenue typically accounting for <50% of full-year numbers in 1H (under the pre-pandemic scenario). Its core market segments in Malaysia registered 29% YoY growth, aided by growing hospital activities – higher bed occupancy rate (BOR) and patient visits. Net gearing improved sequentially to 0.58x from 0.64x in Dec 2022 as the group continued to streamline its balance sheet. A 6 sen dividend was declared.

• Operating metrics and margin performance. KPJ’s total outpatient and inpatient visits recorded -2% and +35% YoY growth to 733,090 and 88,036 respectively, bringing its total patients visit to 821,126 (+1% YoY) in 1Q23. The Malaysia segment saw patient visits grow by 4% YoY, driven by a 22-ppt YoY spike in BOR to 70% from 48%. Notably, this is the highest BOR KPJ has registered post pandemic. The Australia LBITDA widened QoQ and YoY to MYR3.5m, while Malaysia’s EBITDA margin contracted 0.9ppts YoY to 22.8% as a result of higher administrative costs.

• We leave our earnings estimates unchanged, pending KPJ’s post-results briefing today.

• Valuation. Our TP implies 27x FY23F P/E, which is 0.3SD below its 5-year historical average of 28x. We incorporate a 0% ESG premium/discount to our intrinsic value as KPJ’s ESG score is in line with the country median. We still like KPJ for its ample growth opportunities, anchored by its gradual expansion into the health tourism segment, the return of patients post border reopening, and as it is less susceptible to a shortage of nurses.

• Key downside risks: Lower-than-expected patient visits, revenue intensity growth, and higher-than-expected operating costs.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 31 May 2023