• BUY, new MYR1.03 TP from MYR1.23, 17% upside, c.2% yield. 1H22 earnings are at 41% of Street’s full-year estimates, mostly on higher upfront costs from the soft opening of Damansara Specialist Hospital 2 (DSH 2, launch date: 1 Sep). Nonetheless, we are upbeat on its improved bed occupancy rate (BOR) (70% in July and August) and the return of medical tourists post upliftment of border restrictions in April. Our TP (0% ESG premium/discount) implies 26x 2023F P/E, 0.7SD below the historical mean of 35x, on robust FY23F earnings growth of 37% YoY. This report marks the transfer of coverage to Alexander Chia.

• 1H22 results overview. KPJ Healthcare’s 1H22 revenue accounted for 47% of the Street full-year estimate as its BOR improved to 51% (1H21: 40%), while patient visits rose 10% YoY. Across its three key markets, the Malaysia, Indonesia and Australia segments reported +10%, -6% and -4% YoY growth. All three markets reported robust growth in terms of patient visits as well as the number of surgeries. Earnings were below expectations as a result of higher one-off expenditure incurred in relation to the soft launch of DSH 2.

• Medical tourism to underpin near-term growth. With the upcoming launch of DSH 2, management thinks that it will be in a better position to capitalise on the influx of medical tourists in the coming quarters. It expects medical tourism revenue to account for 10% of total turnover by 2022 (vs the pre-pandemic level of 6%), and inpatient numbers from medical tourists to account for 50% of total inpatients this year as well. We believe this should pose a potential upside to KPJ’s revenue intensity in the coming years as medical tourists typically fetch relatively higher revenue intensity.

• Disposal of non-core foreign operations. KPJ expects the disposal of Jeta Garden (aged care unit in Australia) and the Indonesian business to be completed by end 2023. It intends to utilise the cash proceeds from disposal to fund its local business expansion (ie KPJ Penang and Klang) as well as capacity expansion for DSH2, which would feature 1,300 more beds within 3-5 years.

• We cut FY22-23F earnings by 30% and 27% as we factored in the higher cost of medical supplies, as well as staff costs in relation to the potential capacity expansion. We maintain our BUY call, but cut our SOP-based TP to MYR1.03, with a 0% ESG premium/discount. This counter is trading at 25x 12-month forward P/E, at 0.8SD below the historical average.

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

Source: RHB Research - 30 Aug 2022