Investment Highlights

• We upgrade our recommendation on KPJ Healthcare from HOLD to BUY despite revising our SOP-derived FV slightly downwards to RM1.14/share (RM1.15/share previously). We tweak our net profit forecasts downwards by 1.2%, 3.3% and 7.5% for FY19F, FY20F and FY21F respectively. We also roll forward our SOP valuation with FY20F as the base year.

• 1QFY19 core net profit of RM40.3mil (-4.5% YoY) came in below expectations, accounting for 20.8% and 21.1% of our and street’s full-year forecast respectively.

• Key highlights of KPJ’s 1QFY19 results included:

• 1QFY19 topline grew 5.5% YoY to RM868.1mil (from RM822.9mil). This was on the back of a 5.3% improvement in its Malaysian operations.

• KPJ’s core EBITDA climbed 13.7% to RM122.0mil (after excluding the MFRS 16 impact of RM23mil) while core EBITDA margins improved 1.0ppt to 14.1%. We believe the improvement is partly attributed to the group’s cost optimization initiatives although slightly offset by the newly opened KPJ Perlis and KPJ Bandar Dato’ Onn which is still in its gestational period.

• KPJ’s interest expense doubled to RM40.7mil (RM20.3mil in 1QFY18) due to the effect of the MFRS 16 adoption which saw a RM15.8mil finance cost on lease liabilities.

• KPJ’s revenue for the Malaysian segment expanded 5.2% to RM839.3mil on the back of increased patient visits and surgeries in KPJ Rawang, KPJ Pasir Gudang and KPJ Johor and the newly opened hospitals — KPJ Perlis and KPJ Bandar Dato’ Onn.

• The segment’s EBITDA rose 11.6% to RM151.1mil (from RM135.4mil in 1QFY18 upon the add-back of RM20.5mil lease rental amount for comparison purposes). Subsequently EBITDA margins improved 1.0ppt to 18.0% (17.0% in 1QFY18) mainly attributed to cost optimization initiatives by the hospitals.

• The improvements were also due to a higher average revenue per patient (+1.5% YoY outpatient; +9.7% YoY inpatient) and number of beds (+57 beds) but offset by a decrease in both outpatient and inpatient admissions (- 0.4% outpatient; -1.0% YoY inpatient) and occupancy rate (-1ppt to 68%).

• KPJ’s revenue in Indonesia and others segments increased 13.3% to RM28.8mil (from RM25.4mil in 1QFY18) mainly on the back of its Indonesian operation. This was due to a higher number of beds (+12 beds) in Rumah Sakit Medika Bumi Serpong Damai as well as a higher number of patients YoY (+8.4% outpatients; +45.6% inpatients) contributed by an aggressive marketing activities and treatment packages introduced.

• The resulting EBITDA grew to RM3.8mil (RM1.7mil in 1QFY18). This was mainly attributed to better utilization of resources and appreciation of the Indonesian rupiah against the MYR which reduced the foreign exchange loss.

• KPJ’s share price has fallen 8.8% YTD from RM1.02/share to the current level of RM0.93/share. Hence with an upside of 22.6%, we believe this is a buying opportunity for the stock as we continue to like KPJ Healthcare for its vast network of hospitals in Malaysia, capacity expansions and its position to benefit from the national health insurance scheme.

Source: AmInvest Research - 3 Jun 2019