Investment Highlights

• We maintain our HOLD recommendation on KPJ Healthcare with an unchanged FV of RM1.15 based on DCF. Our DCF is based on a WACC of 7.65% and a terminal growth rate of 3%. We like KPJ Healthcare for its vast network of hospitals in Malaysia, capacity expansions and it being a potential beneficiary of the health insurance scheme. However, we believe at its current share price, the company is close to its full valuation.

• 9MFY18 net profit came broadly in line with our expectations, accounting for 70% of our and street’s fullyear forecast respectively. KPJ’s net profit rose 22.3% to RM126.5mil.

• Key highlights of KPJ’s 3QFY18 results included:

1.  9MFY18 topline grew 4.2% YoY to RM2,444.8mil (from RM2,346.3mil). This was on the back of higher patient admissions, number of beds as well as higher number of surgery cases mainly contributed by KPJ Rawang, KPJ Pasir Gudang and KPJ Bandar Maharani. The group has also extended promotions to a neighbouring country as well as online promotions.
2.  KPJ’s inpatient admission rose 2.6% to 221K while its average revenue per inpatient improved by 1.8% to RM7,501/inpatient. Number of operating beds is now at 3,060 compared to 3,052 in 9MFY18.
3.  KPJ’s EBITDA climbed 15.3% YoY to RM 328.8mil (from RM285.2mil in 9MFY17) driven by cost optimisation and higher average revenue per patient but offset by a 56.6% decline in EBITDA under its Indonesian operations to RM2.8mil (vs. RM6.4mil previously). Its Indonesian segment was hit by a stricter government regulations over cases and treatment on patients under BPJS Kesehatan (an Indonesian national health insurance system) which resulted in a lower number of patients (-2.7% outpatient and -5.3% inpatient admissions).
4. EBITDA margins improved 1.3ppts to 13.5% (from 12.2% in 9MFY17). We believe this is due to the cost optimisation efforts by the group as well as a positive impact of the tax holiday.

• Moving forward, we expect EBITDA margins to remain near this level, supported by the implementation of the SST which reduced service fees and sales tax on most medical supplies.

Source: AmInvest Research - 30 Nov 2018