• KPJ Healthcare (KPJ) posted a weak set of 2Q17 core earnings which fell 16% yoy and 38% qoq. The setback was largely due to higher operating costs and depreciation charge.

• For the 1H17 period, core earnings rose 7% yoy to RM84m to trail our forecast at only 40% but largely in-line with the street at 47%.

• While we expect some earnings respite in 2H17, we take a more conservative stance and trim FY17E by 7% while mildly tweak FY18/19E by 0.5-0.6%.

• Reduce to HOLD with a lower SOP-derived TP of RM4.60. We continue to like its earnings prospect. .Revisit at lower levels.

A seasonal blip

KPJ performed poorly in 2Q17 as core earnings were weaker on qoq and yoy basis as revenue growth was tepid, exacerbated by higher opex and depreciation charge. For 1H17, core earnings were below expectations to make up only 40% of our estimates but was broadly in-line with consensus at 47%.

Seasonal impact…

We believe the seasonal impact from the Ramadhan month and Hari Raya break contributed to the weak performance. We note that while 2Q16 also saw the full Ramadhan month impact in the quarter, the Hari Raya break was in 3Q16, mitigating the seasonal impact in 2Q16.

…and then some

Also worth noting was higher operating expense (+3.1% qoq and +4.3% yoy) due to cost inflations on consumables and higher staff costs. Meanwhile, depreciation charge rose (+11.4% qoq and +11.1% yoy) arising from a slew of Brownfield expansions and refurbishment of existing facilities and/or new device purchases.

Still positive on prospects

While we expect some earnings respite in 2H17 from combination of price revisions, normalising of patient volume and improving maturity across all of its hospitals, we err on the side of caution. We lower our FY17E earnings forecasts by 7% and mildly trimmed our FY18E and FY19E by 0.5-0.6%. Notwithstanding, we remain positive on KPJ’s medium to long term prospects leveraging on its expansive hospital network and resilient demand for quality private healthcare amidst the backdrop of an aging nation.

Reduce to HOLD with a lower TP of RM4.60

We downgrade KPJ to HOLD with lower SOP-derived TP of RM4.60 which implies an FY17 PE of 25x before easing to 21x in FY18. The lower TP was mainly due to higher share base from ESOS issuance. Impact to TP from our earnings revision was minimal.

Source: BIMB Securities Research - 25 Aug 2017