• 4Q18 core profit of RM60m (+32% qoq) was due to higher revenue from Malaysia operation as patients’ numbers increased.

• However, YoY core profit fell -3.6% mainly on higher effective tax rate despite revenue growth by 3.6%.

• Overall, FY18 core profit of RM196m trailed our expectations at 91%, due to higher-than-expected operating cost, but was in-line with consensus estimates at 101%.

• We revised down our forecast for FY19 (-8%) and FY20 (-5%) to account for higher operation cost and slower Indonesia operations.

• Maintain HOLD with a SOP-derived TP of RM1.00 rolled over to FY19.

Improved QoQ performance

4Q18 core profit grew 32% qoq to RM60m largely on higher revenue from Malaysia operations and better cost optimisation at greenfield hospitals. Revenue rose on higher patients’ volume (inpatient: +2.7% and outpatient: +5.0%), number of beds and surgeries increased particularly from KPJ Rawang, KPJ Pasir Gudang and KPJ Bandar Maharani.

YoY performance impacted by higher effective tax rate

On yoy basis, revenue grew 3.6% to RM863m. The positive performance was driven by the Malaysian operations on the back of increased number of patients (+7%) and complex cases per inpatient. However, core profit dropped by 3.6% largely due to higher effective tax rate (c.+3.3ppts).

Weak FY18 Indonesia operation

It swung into losses in 2018 on weak revenues (-11% yoy). This was mainly due to lower patient volume amidst stricter regulations imposed over cases and treatment under the BPJS Kesehatan scheme, especially in RS Bumi Serpong (refer table2).

Higher dividend declared

KPJ declared higher 4th interim DPS of 0.5sen (vs 4Q18: 0.4sen). Total FY18 DPS is 2.0sen (vs FY17: 1.8sen), translating into dividend yield of 1.9%.

Lowering expectations

We expect further revenue improvements from new hospital openings in 2019 (KPJ BDO, Kuching and Miri) and from more matured hospitals. However, operating cost remain high on account of its expansion plans while we expect the Indonesia operations to remain in the red amidst shortage of contract doctors. We revised pare down estimates for FY19 (- 8%) and FY20 (-5%) on higher-than-expected opex and protracted recovery at its Indonesia operation.

HOLD with new TP of RM1.00

Despite the earnings cut, our TP is maintained at RM1.00 as we rolled forward our DCF valuations to FY19. Our DCF assumes WACC of 7.6% and long term growth of 1%. Hold.

Source: BIMB Securities Research - 20 Feb 2019