- We reaffirm our HOLD call on KPJ Healthcare Bhd with a tweaked fair value of RM3.68/share (vs. RM3.70/share earlier), based on our DCF valuation.

- KPJ reported a 3Q core net profit of RM29.1mil, bringing 9MFY14 core net profit to RM93.1mil. KPJ declared an interim dividend of 2 sen/share, bringing the total dividends declared YTD to 4.9 sen/share.

- The results were slightly below our previous estimate, representing 68% or our full-year forecast but in line with consensus estimate at 74%. As such, we have trimmed our FY14F earnings slightly by 6% to RM130mil.

- KPJ continued to see margins improvement due to operational efficiency of its newly-opened hospitals. For the 9M period, EBITDA margin improved to 12% from 9.6% a year earlier. Sequentially, it improved to 12.5% from 12% in 2Q (1QFY14: 9.1%).

- Revenue increased by 13.2% YoY to RM1.9bil for the 9M period due to higher contributions from existing hospitals being ramped up as well as new hospitals opened this year.

- New hospitals that were opened up this year are the Rawang Specialist Hospital (March 2014), and Maharani Specialist Hospital, Muar (June 2014).

- KPJ Pahang Specialist Hospital (total capacity of 188 beds) is slated for completion by year-end.

- Next year, KPJ will see the completion of Perlis Specialist Hospital (90 beds; 2Q15) and Bandar Dato’ Onn Specialist Hospital (390 beds; 4Q15). Four more are slated for completion in 2016 and beyond. However, note that it would take 2-3 years of gestation period for new hospitals to break even.

- KPJ’s continued margin improvements are positive but we remain conservative as KPJ may see margin pressure given the new hospital openings in the pipeline.

- A positive catalyst for KPJ is its ability to turn around new hospitals faster than expected, which could significantly improve margins.

- We maintain HOLD. KPJ is currently trading at an FY14F PE of 32x.

Source: AmeSecurities