• KPJ’s 9MFY16 net earnings of RM97.0m is within our forecasts, making up 72% of our full year numbers, however it was below consensus which only made up 69%.

• Margins were lower due to higher operating costs.

• Qoq earnings saw some improvement.

• We reduced our FY16 and FY17 earnings forecast.

• Target price revised to RM4.22. Maintain HOLD.

Lower earnings. KPJ’s 9M16 earnings declined by 10.2% despite a 6.1% increase in revenue mainly due to rising operating costs. Cost of sale (COS) increased by 8.8% to RM1,510.5m YTD, while net finance cost rose 13.4% to RM44.9m. As a result of higher operating costs particularly medical supplies and staff costs, EBIT margin declined from 8.1% to 7.2% in 9M16.

Qoq improved. Qoq net profit improved by 7.1% to RM32.5m as COS fell by 0.5% to RM511.9m. Correspondingly, EBIT margin improved slightly from 6.7% to 6.8% for the same period.

Reducing our numbers. We reduced our FY16 and FY17 net earnings forecasts slightly to RM131.4m (-2.9%) and RM136.7m (-3.4%) in view of the rising operating costs particularly medical consumables and staff expenses.

General outlook challenging. We believe the short-term outlook for the group to remain weak due to the challenging business environment. Nonetheless, with the continuous expansion programme and recession-free nature, we reckon the long-term view for KPJ shall remain stable.

View and recommendation. Following the earnings reduction, our target price is revised downwards to RM4.22 from RM4.35 based on PER of 32x. The stock does not provide much upside; hence we maintain our HOLD recommendation.

Source: BIMB Securities Research - 1 Dec 2016