- We re-affirm our BUY recommendation on KPJ Healthcare with an unchanged fair value of RM8.00/share, based on our DCF valuation, following the release of the 1Q results.

- KPJ started the year slow, registering 1QFY13 core earnings of RM25mil, which accounted for 17% and 16% of our and consensus’ full-year estimates, respectively. Dividend of 2sen/share was declared.

- In our view, the results are considered in line with expectations. The 1QFY13 earnings were weighed down by losses from the new hospitals coupled with pre-operating cost incurred for Pasir Gudang Specialist Hospital. 1Q is generally the weakest due to short period arising from Chinese New Year.

- We expect earnings to gain momentum in the coming quarters and to recover for the shortfall, underpinned by improved operational efficiency of the new hospitals over time.

- Gestation losses arising from new hospitals have lead core earnings to decline by 25% YoY, despite a 4% increase in revenue. Stripping off the RM10mil gain on disposal of shares in Al-‘Aqar Healthcare REIT (HOLD, RM1.45/unit) and gains on revaluation in 4QFY12, PBT inched up marginal by 1% QoQ.

- EBITDA margin improved to 9.5% from 9.2% in 4QFY12, but still below the high of 1QFY12’s 11.4%. We reckon this is due to the gestation period of new hospitals.

- On the operation front, Australia and Indonesia divisions were still loss-making, while Malaysia hospitals continue to command the lion share. Vejthani hospital in Thailand contributed RM0.6mil to the bottom line.

- Pipeline of hospital remains healthy with upcoming openings by end-FY13F – Sabah Specialist Hospital, Pasir Gudang Specialist Hospital, Maharani Specialist Hospital and Rawang Specialist Hospital.

- We are confident of the group’s aggressive expansion strategy, in view of its solid expansion track record. Long-term profile visibility is expected to be boosted further with the expansion of 11 hospitals, which will lift bed capacities by 65% over FY15F.

- KPJ is a key beneficiary to the growing healthcare theme in Malaysia supported by a strong domestic foothold (19%). This is further driven by the booming medical tourism and defensive earnings profile.

- Valuation is attractive at 23x FY14F’s PE – trading at a discount 56% peers’ average – with EV/EBITDA of 13x and 14% ROE.\

Source: AmeSecurities