• Keep BUY, with a lower MYR2.13 TP from MYR2.14, 15% upside. We walked away from KPJ Healthcare’s 2Q24 post results briefing feeling positive on its 2H24 prospects. We expect KPJ’s profitability to improve as its flagship hospital Damansara Specialist Hospital 2 (DSH2) remains well on track to see narrower LBT, thanks to better operating leverage. Our DCF- derived TP represents 15x 2024F EV/EBITDA, 2SD above its 5-year historical EV/EBITDA average of 12x. Our TP includes a 2% ESG premium.

• Key takeaways. To recap, KPJ posted a robust set of operating statistics in 2Q24 as hospital activities picked up post Aidilfitri period in April. Hospital activities increased steadily (+14% YoY) as the group saw a better patient case mix on the back of 9% YoY increase in surgeries conducted. Management highlighted nurse shortages are now less severe than 2023 as KPJ looks to ramp up recruitment for sub-specialty specialists in 2H24. This corresponds with its bed expansion target of 300-380 beds (by 2H24) and the group’s rebranding exercise to upscale its hospital services.

• Hospitals under gestation. Five hospitals under gestation reported a narrower LBT of MYR10m during 2Q24 (1H24 LBT: MYR35m), after registering MYR25m LBT in 1Q24. Positively, four of the five hospitals are already generating positive EBITDA since January, based on improvement in operating efficiency. DSH2’s average revenue per month grew to MYR10m in 2Q24 vs MYR3-4m in 2023. DSH2’s key success is anchored by higher intensity treatment offered (ie robotic Da Vinci XI surgery and minimally invasive cardiac surgery) with the help of advanced medical equipment.

• Health tourism (HT). KPJ recorded HT revenue of MYR56m in 2Q24, representing 24% YoY growth (+10% QoQ) premised on higher influx of patients from Indonesia. Management has set an ambitious target of achieving 20% HT revenue contribution to the group in the next two years (from the current 6%) by leveraging on establishing a centre of excellence in each of its flagship hospitals, driving growth from new market (Middle East patients visiting DSH2) as well as strengthening its local presence in Indonesia by setting up representative offices and recruitment of agents.

• Earnings revision and valuation. We trimmed our 2024-25 earnings estimate by 3% and 2% after some housekeeping. Post adjustment, our TP is now lower to MYR2.13, which implies 15x EV/EBITDA, 2SD above its 5-year historical average. We like KPJ given the group’s solid execution in turning around its hospitals under gestation (offering room for margin improvement), potential opportunities to be unlocked via expansion into HT segment, and upscaling existing hospitals into tertiary care centres (enabling KPJ to tap into more complex and uncommon procedures).

Source: RHB Research - 30 Aug 2024