RHB Investment Bank Bhd (RHB), in its Malaysia Results Preview today (Mar 22), said they expect KPJ Healthcare Berhad’s 1Q24 net profit to come within a MYR67-72m range (representing 26-36% YoY growth) predicated on strategic upscaling initiatives in driving the growth of revenue intensity, improvements in operating efficiency from hospitals under gestation, and pick-up in health tourism (HT).
RHB’s DCF-derived TP represents 15x 2024F EV/EBITDA, 2SD above the 12x 5-year historical EV/EBITDA average and the bank stays on BUY on a higher MYR2.12 TP (DCF)from MYR1.86, 12% upside.
RHB’s TP incorporates a 0% ESG premium/discount given KPJ Healthcare’s 3.0 ESG score.
Results preview
RHB expects KPJ to continue posting positive YoY earnings growth – underpinned by robust patient traffic growth, improving operating efficiency of hospitals under gestation, and pick-up in foreign patient visits.
Notwithstanding the above, RHB gathered that the group is set to see a better patient-case mix in 1Q24 – this could potentially lift revenue intensity higher.
Additionally, the Health Ministry’s latest move to exempt the post basic qualification exemption for foreign nurses to work here (from Oct 2023 till Sep 2024) could potentially address the country’s nursing shortage issue.
RHB believes a private hospital player like KPJ could capitalise on such opportunities to meet its nursing requirements.
Based on RHB’s channel checks, five hospitals under gestation are set to post narrower EBITDA losses in 1Q24, underpinned by gradual improvements in operating efficiency.
Notably, Damansara Specialist Hospital 2’s (DSH2) bed occupancy rate in Jan 2024 was guided to increase to 50% on top of healthy growth in average monthly revenue (c.20% MoM).
Note: DSH2 recently boosted its operating beds to 100. It looks to add 30-50 beds by end 2024.
RHB thinks visa-free entry to foreign tourists (particularly from China and India) is set to have a positive spillover effect on the HT sector here, as the two nations contributed 5% and 3% to Malaysia’s HT revenue.
KPJ’s key emphasis: Prioritising the strengthening of its presence in Indonesia by setting up representative offices and recruiting agents that can help lead Indonesian patients along their HT route. Management has set an ambitious target of achieving 18-20% market share by 2024-2025 from the current 6%.
RHB kept their earnings estimates unchanged but lowered required returns assumption to 9.2% from 9.6%. This is predicated on the various catalysts mentioned above.
RHB maintains BUY with a higher MYR2.12 TP, which implies 15x EV/EBITDA, 2SD above KPJ’s 5-year historical average.
The 15x EV/EBITDA level is on par with IHH Healthcare’s (IHH MK, BUY, TP: MYR7.50) traded EV/EBITDA for the past two years, as RHB thinks KPJ’s domestic-centric focus (more defensive play) should offer it a valuation premium over IHH in the near term.
Key downside risks: Lower-than-expected patient visits and higher-than-expected operating costs.
