- We maintain HOLD on KPJ Healthcare Bhd with a higher DCF-derived fair value of RM4.60/share (vs. RM4.10/share previously) as we roll-forward our base year to FY16F.

- For the 9M period, KPJ reported earnings of RM108mil – a 16% improvement from RM93mil a year earlier. This is on the back of a 12% topline growth.

- Earnings are broadly in line - making up 79% and 72% of our and market expectations.

- Sequentially, 3Q revenue grew 6% on flattish revenue. This can be attributed to a lower effective tax rate (26% vs. 29%).

- We believe price reversions and improved efficiency helped to sustain EBITDA margins at 12.5% during the quarter.

- ON a 9M basis, the improving revenue can be attributed to the continued ramp-up of existing hospitals. Notably, KPJ Rawang (opened in March 2014) has reached EBITDA positive and is expected to breakeven by mid-2016. KPJ Pasir Gudang is also expected to achieve breakeven next year.

- KPJ declared a single-tier interim dividend of 1.75sen (YTD total: 5.25 sen, yield: 1.2%). The ex and entitlement dates are 29 Dec and 31 Dec, respectively.

- KPJ Pahang is on track to open in 4Q15 with an initial capacity of 120 beds (full: 190 beds). This project is a relocation of the existing facilities in Kuantan (70 beds), which may be used as a cancer or aged care centre after the relocation. Meanwhile, KPJ Perlis is expected to be opened in 1Q16. Recall that the opening of both hospitals was pushed forward by ~6 months due to a construction delay.

- Looking ahead, KPJ Kuching and Miri are slated for opening in 2017 and the flagship Bandar Dato’ Onn Specialist in 2018. As for KPJ Damansara 2, negotiations are still ongoing to finalise the design and rental yield.

- We have tweaked our numbers to reflect the pipeline of hospital openings and additional capacity. Overall, we are forecasting a 3-year earnings CAGR of 11%. This results in 1%-3% increase in earnings for FY15F-17F vs. our previous forecasts.

- We maintain HOLD as KPJ is currently trading at 27x FY16F PE – close to its 3-year average of 30x. Our DCF value is based on WACC of 7.8% and terminal growth of 0%.

Source: AmeSecurities Research - 27 Nov 2015