• Maintain BUY, TP rises to MYR3 from MYR2.13, 29% upside with c.2% FY25F yield. KPJ Healthcare’s 3Q24 core earnings grew by 29% YoY to MYR86m, bringing its 9M24 total to MYR211m which, in turn, accounts for 74% and 73% of our and Street’s full-year estimates. Results are in line, underpinned by improvements in operating leverage from hospitals under gestation as well as a better patient case mix. Our DCF-derived TP also implies 19x 2025F EV/EBITDA vs its 5-year historical EV/EBITDA average of 12x.

• Results overview. KPJ reported its highest ever revenue in 3Q24, at MYR1,003m (+14% YoY) – thanks to robust patient traffic and a better patient case mix. 3Q24 core profit surged 29% YoY to MYR86m, driven by improved operating efficiency, with hospitals under gestation booking narrower QoQ losses. An interim DPS of 1.15 sen was declared vs 0.8 sen in 3Q23 – representing a dividend payout ratio of 58% vs 38% in 3Q23.

• Operating statistics. The number of outpatient and inpatient visits increased by 2% and 7% YoY to 784,437 and 103,228, bringing total patient visits to 887,665 (+2% QoQ). KPJ’s bed occupancy rate improved by 6ppt QoQ (-1ppt YoY) to 72%, with 3,787 operational beds (+42 QoQ). Core EBITDA margin narrowed by 0.9ppts YoY to 23.2%, likely driven by higher opex in relation to nursing wage adjustments made in 1Q24.

• We keep our earnings estimates unchanged as results are in line.

• Valuation. KPJ’s valuation has stayed above its historical EV/EBITDA average of 12x since the start of the year. While its current valuation may seem steep, we believe it is fair – considering a permanent, structural shift affecting the industry that is driven by an ageing population, a growing investors’ appetite for high-quality healthcare assets (two of the recent M&A were transacted at 20x EV/EBITDA), as well as room for scalability between KPJ and other premium healthcare service providers in Malaysia – price/bed of MYR1m vs IHH Healthcare (IHH MK, BUY, TP: MYR8.80) and Sunway Medical’s MYR1.3m and MYR1.4m. Post results, we cut our equity required return assumption to 7% from 8%, to reflect the fact that investors are leaning more towards good-quality healthcare assets presently. Our new TP also implies 19x 2025F EV/EBITDA, against its 5-year historical average of 12x. KPJ’s valuation deserves a premium due to its solid turnaround story (there is room for margins to widen from hospitals under gestation). Meanwhile, investors’ growing appetite for the healthcare sector should lead to a valuation re-rating for healthcare players – in tandem with Sunway Healthcare Group’s possible listing in the medium term. Key downside risks: Lower-than-expected patient visit numbers, lower revenue intensity growth, and higher-than-expected operating costs.

Source: RHB Securities Research - 26 Nov 2024