• Maintain BUY and TP of MYR1.03, 19% upside and c.3% FY23F yield. 9M22 earnings came in at 84% and 94% of our and Street estimates mainly attributed to the return-to-norm hospital activities following the lifting of movement restriction orders in April, better bed occupancy rate (BOR), and stringent cost management practices leading to an overall improvement in operating efficiency. Our TP incorporates a 0% ESG premium/discount and represents 26x 2023F P/E, or -0.7SD from its mean of 35x on robust earnings growth outlook of 37% for 2023F.

• 9M22 results overview. 9M22 core earnings grew more than two-fold to MYR104m, accounting for 84% and 94% of our and Street estimates. Across the three key market segments that KPJ Healthcare has a presence in, Malaysia and Indonesia markets posted 17% and 6% YoY growth during 3Q22, while its Australia operations (aged care facilities) eased 4% YoY. The group declared a dividend of 0.55 sen, bringing 9M22 dividend payout to 1.0 sen, or a payout ratio of 42%.

• Operating metrics and margin performance. KPJ’s total outpatient and inpatient visits recorded 13% and 59% YoY growth to 822,994 and 88,001 during 3Q22, which even surpassed the pre-pandemic levels. BOR improved 6ppts YoY to 51% on a 9M22 basis, helped by 22ppts YoY pick up in its Malaysia operations to 66%; offset by a weaker BOR from Jeta Garden (3Q22: 85% vs 3Q21: 89%). The overall better operating metrics, coupled with cost optimisation strategies implemented, led to a 2.8ppts YoY increase in core EBITDA margin of 23.4%. Indonesia saw encouraging growth following delivered EBITDA of MYR5.5m from a loss of 0,3m a year ago, bringing 9M22 EBITDA margin to 15% from -2% in 9M21, likely attributed to the return of medical tourists. Australia’s EBITDA remained in the red, albeit narrowed on a QoQ basis, as the lower BOR was attributed to the highly competitive nature in the country’s aged care services market. Malaysia’s EBITDA margin was better by 3ppts YoY to 24%.

• Earnings revision. We keep our earnings estimates unchanged pending the post-results briefing scheduled on Friday.

• Valuation. Maintain BUY with an unchanged DCF-based TP of MYR1.03. We incorporate 0% ESG premium/discount to our intrinsic value as KPJ’s ESG score is in line with the country median. The stock currently trades at 25x FY23F P/E, or 0.8SD below its historical average of 35x.

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

Source: RHB Research - 24 Nov 2022