RESULTS

• No surprises. KPJ Healthcare's (KPJ) 1Q18 net profit of RM42m was up 5% yoy (-31% qoq) due to better top-line growth and higher associate contribution. This represented 23%/24% of our/consensus respective full-year forecasts, similar to historical trends and hence, within expectations. An interim DPS of 0.5sen (-9% yoy) was declared.

• Decent top-line spurt… Group revenue spiked 6% yoy in 1Q18, thanks to a good performance at Malaysia (+6% yoy). Nevertheless, the weaker sales from Indonesia (-19% yoy) and others (-5% yoy) - from a low base - continued to mitigate overall growth. Notably, average revenue per outpatient and inpatient rose 1-2% yoy during the period while total patient visits improved 4% yoy.

• …and other non-operational items uplifted earnings. During the quarter, EBIT margin remained relatively flat at 9% despite occupancy rate improving 1ppt yoy (to 69%); this was owed to higher administrative expenses (+8% yoy). Aside from revenue growth, lower financing cost (-3% yoy) and higher associate contribution (+42% yoy) lifted bottom-line by 5% yoy. The dip in qoq earnings is not worrisome as 4Q is typically a good seasonal quarter on positive accounting adjustments.

• Update and outlook. The hospital openings timeline at Bandar Dato’ Onn, Miri, and Kuching were all pushed back by one quarter to 3Q18, 2Q19, and 2Q19 respectively; this is not overly concerning as KPJ still has room to accommodate patient flow seeing its current occupancy rate of only 69%. Separately, Jeta Gardens (its 57%-owned aged care business in Australia) is still up for sale. If successful, we view this as a positive as KPJ will no longer need to carry this burden in its books while also freeing up capital to pare down debts or for reinvestment purposes (Jeta Gardens was acquired in 2010 for RM19m). In 1Q18, group net gearing stood at 0.7x (1Q17: 0.8x). To manage its stretched balance sheet, KPJ had in Jul 17 capped dividend payout at RM80m per year, translating into a yield of 2%.

EARNINGS REVISION

• No change to our forecasts. Key downside risks include: a) market share losses, b) delay in hospital openings, and c) inability to pass on higher operating costs to customers.

VALUATION/RECOMMENDATION

• Maintain BUY and target price of RM1.07, based on 28x 2019F PE. This is in line with its 5-year forward mean PE of 28x but below the sector's 40x. We believe the discount is fair, as KPJ has a stretched balance sheet (net gearing of 0.7x vs sector mean of 0.4x) and generates an anaemic ROE (10% vs sector's 14%).

• Compelling long-term investment. We like KPJ for operating in a rather defensive sector and it is blessed with positive structural trends like: a) ageing population, b) ‘lifestyle’ diseases, and c) rising affluence that will continue to support and drive organic growth. We believe investors with a longer-term investment horizon will be rewarded.

Source: UOB Kay Hian Research - 31 May 2018