• Keep BUY, higher MYR2.14 TP (DCF) from MYR2.12, 10% upside. We walked away from the 1Q24 post-results briefing feeling upbeat on KPJ Healthcare’s 2H24 prospects. It is on track to achieve another record-high revenue year on healthy patient footfall, pick-up in health tourist visits, and sustainable growth in revenue intensity. Our TP represents 15x 2024F EV/EBITDA or 2SD above its 5-year historical average of 12x. Our TP incorporates a 2% ESG premium, given KPJ’s 3.1 ESG score.

• Key briefing takeaway. Recap: 1Q24’s performance was impacted by two weeks of Ramadan (commenced on 12 Mar vs 1Q23’s 23 Mar). That said, as we move into 2Q24, KPJ expects to see improving operating metrics, as Ramadan stretched into whole month of Apr 2023 vs only two weeks this year. Hospital activities were slightly muted in 1Q24 (-6% QoQ) due to the abovementioned factors. Nonetheless, revenue intensity saw robust growth (+3% QoQ) while inpatient/outpatient intensity grew 4% QoQ. KPJ underwent staff remuneration package adjustments and incurred higher repair & maintenance costs (which we believe was part of its brand upscaling exercise), resulting in higher administrative expenses (+19% YoY) in 1Q24.

• Hospitals under gestation. Five such hospitals reported a narrower LBT of MYR24-26m during 1Q24 vs MYR34-36m in 1Q23 (4Q23 LBT: c.MYR34m), underpinned by gradual improvements in operating efficiency. Notably, bed occupancy rates at Damansara Specialist Hospital 2 (DSH2) inched up 4.1ppts QoQ to 52.3% during this period (56% in March), notwithstanding the effect of increased number of beds to 99 in 1Q24 from 60 beds in the previous quarter. Management intends to add another 40 beds, bringing DSH2’s total bed count to 140 by end 2024.

• Health tourism. President & MD Chin Keat Chyuan and other C-suites have been embarking on marketing roadshows to promote KPJ in Indonesia. We gathered these roadshows received overwhelming responses from visitors. Moving forward, KPJ intends to strengthen its presence there by setting up representative offices and recruiting agents to help lead local patients along their health tourism journey. Management also set an ambitious target of achieving 18-20% market share by 2024-2025 from the current 9%.

• Earnings revision and valuation. We trim our 2024F-2025F earnings by 4% and 1% to take into account higher staff costs. We also take this opportunity to raise our G score, as KPJ has begun to incorporate sustainability performances under its leadership KPIs in 2024. Consequently, our ESG score is now 3.1 from 3.0. Post adjustment, our TP is now higher at MYR2.14, which implies 15x EV/EBITDA or 2SD above its 5-year historical average. Key downside risks: Lower-than-expected patient visits/revenue intensity growth and higher-than-expected operating costs.

Source: RHB Research - 29 May 2024