- We maintain HOLD on KPJ Healtchare with a higher DCF-derived fair value of RM4.10/share (from RM3.70/share previously), as we roll forward our base year to FY15F.

- KPJ reported a 4Q net profit of RM46.6mil, bringing the FY14 earnings to RM139.7mil.

- Excluding EIs – i.e. gains on fair value adjustments (for Menara 238) and in relation to investment properties of associate, Al-‘Aqar REIT – of RM16.4mil, KPJ would have recorded a core net profit of RM123mil for FY14. Results are within both our and consensus forecasts.

- KPJ declared a single-interim dividend of 2.6 sen/share, bringing the total dividends declared for FY14 to 7.5 sen (vs. 6sen/share in FY13).

- Topline grew by 13.2% due to higher contributions from existing hospitals being ramped up as well as new hospitals that opened during the year. Hospitals that opened last year included Rawang Specialist Hospital (initial capacity: 30 beds) and Maharani Specialist Hospital (60 beds) in Muar.

- Notably, EBITDA margin for FY14 improved to 12% (from 10% in FY13). We believe this was attributable to price reversions as well as improved operational efficiency.

- Sequentially, core earnings improved 4% to on the back of a 9% topline growth. EBITDA margin was flattish at ~12%.

- Its Pasir Gudang hospital (60 beds capacity currently) is expected to turn EBITDA breakeven soon. However, its Maharani hospital has yet to break even as it was opened in a new market (current occupancy rate of ~50%).

- The completion of the Pahang Specialist Hospital has been postponed (from end-2014 to 1H15; 120 beds) as construction activities were affected by the recent floods. Another hospital slated for completion this year is the Perlis Specialist (in 2H15; 60 beds). Thus, KPJ is expected to have 27 hospitals under its stable by year-end.

- The GST implementation is expected to result in a 3%-4% increase in input costs for KPJ but this will be partially mitigated by price reversions. Thus, we expect net margins to remain flat (at 5%) this year as revenue expand by 8%.

- Tender for the flagship Bandar Dato’ Onn Specialist Hospital is expected to be awarded soon with expected completion in 2H16. The deadline for the finalisation of KPJ Damansara Specialist II is April.

- While demand for healthcare will continue to rise, we see continued margin pressure post-GST implementation and new hospital openings in the pipeline. We maintain HOLD. KPJ is currently trading at an FY15F PE of 31x.

Source: AmeSecurities