• KPJ’s 3Q18 core profit dropped 3% qoq to RM45m mainly due to higher effective tax rate despite revenue growth by 2%.

• YoY core profit increased by 44% largely due to higher revenue from Malaysia operation and better cost optimization initiatives.

• Overall, 9M18 core profit of RM136m came in below our expectations at 63%, but broadly in-line with consensus at 75%.

• An interim dividend of 0.5sen (vs. 3Q18: 0.4sen) was declared.

• We maintain our forecast with a hold call and TP of RM1.00 based on SOP method with WACC of 7.7%.

QoQ performance impacted by higher effective tax rate

KPJ’s 3Q18 revenue grew 2% qoq to RM821m. The positive performance was driven by the Malaysia operations on the back of increased number of patients (+5%) and complex cases per inpatient. However, core profit dropped by 3% to RM45m largely due to higher effective tax rate.

Strong yoy performance

On yoy basis, core profit increased by 44% largely due to higher revenue from Malaysia operations and better cost optimisation initiatives mainly at the greenfield hospitals undergoing gestation period. Overall, 9M18 core profit of RM136m was below our expectations at 63% despite in line in revenue, due to higher operating cost than expected.

Malaysia growth remain steady

Malaysia operation remain positive with 3Q18 revenue grew 2% qoq and 4% yoy. The growth was driven by increase in number of complex cases per inpatient on top of higher inpatient admissions (7.7% qoq and 4.5% yoy), particularly in KPJ Rawang, KPJ Pasir Gudang and KPJ Bandar Maharani. PBT increased by 19.7% yoy, improving its PBT margin to 8.1% (+1.1ppts).

Weak Indonesia operation

The segment faced challenges where occupancy rate for Rumah Sakit Bumi Serpong fell to 28% (3Q17: 34%) whilst gains from the higher occupancy rate at Permata Hijau of 55% (3Q17: 35%) was diluted by weak Rupiah. Lower patients admissions recorded at Rumah Sakit Bumi Serpong (inpatient: -25.6%yoy, outpatients: -16.5%yoy) due to stricter regulations imposed over cases and treatment on patients.

Maintain hold with TP of RM1.00

Moving forward, we expect further revenue improvements coming from KPJ’s new hospitals (KPJ Bandar Dato’ Onn expected in 4Q18) as well as its more matured hospitals. However, there is a potential downside risk to our forecast due to higher cost than expected. Maintain hold recommendation with SOP-derived TP of RM1.00.

Source: BIMB Securities Research - 30 Nov 2018