• KPJ Healthcare (KPJ) 1Q17 core earnings grew strongly by 28% yoy to RM51m but fell 12% qoq. Overall, earnings was ahead of ours and consensus estimates.

• At the EBITDA level, earnings were flat yoy and declined 5% qoq to an estimated RM619m in 1Q17.

• Core earnings were 22% of our estimates which we deem as being in line ahead of earnings respite in coming quarters due to seasonality factors.

• Upgrade to BUY with a new SOP-derived TP of RM4.75. We believe KPJ is sorely overlooked, in our view, trading at a discount to peers despite delivering robust earnings growth.

Strong growth on better maturity

KPJ’s 1Q17 core earnings rose 28% yoy on improved performance of existing hospitals as well as turnaround of some of the new hospitals (ie. KPJ Bandar Maharani) in the quarter. Against 4Q16, core earnings fell 12% qoq, partly due to higher opex and higher effective tax rate in 1Q17. Overall, 1Q17 core earnings ran ahead of ours and consensus forecasts at 38% and 34% respectively.

Core earnings surged yoy on organic growth

On headline basis, earnings rose 12% yoy. However, adjusting for share-based payment (ie. ESOS) of RM13.2m, 1Q17 core earnings grew 28% yoy. This was due to combination of higher revenue per patient (ie. both in/outpatient) following price adjustment in 4Q16, improving profitability for some of its hospitals (ie. KPJ Bandar Maharani), significant improvement from Indonesia as RS Medika Bumi Serpong achieved better operating scale, and lower losses from its Australia operations.

…but slumped on qoq basis

Group revenue grew 7% qoq driven by the Malaysia and Australia assets. At Malaysia, patient volume grew +3.2% qoq to over 693k patients. Nevertheless, gains were offset by higher opex and the significant jump in effective tax rate to 23.8% (4Q16: 16%).

Earnings revamped

Overall, 1Q17 earnings ran ahead of our forecasts at 38% partly due to lower-than-expected operating expense. As such, we raise our FY17 and FY18 earnings by 32% and 50% respectively while we debuted our FY19 earnings.

Upgrade to BUY

We upgrade KPJ to BUY (from HOLD) with a SOP-derived TP of RM4.75 which implies an FY17 PE of 24x before easing to 22x in FY18. We believe KPJ is sorely overlooked partly due to its high gearing which we argue has eased to 0.75x from 0.83x in 2Q16.

Source: BIMB Securities Research - 29 May 2017