• 1Q19 core profit of RM44m fell 9.4% qoq and 4.5% yoy mainly on higher depreciation charge and tax rate which more than offset revenue growth of 0.6% qoq and 5.5% yoy.

• Overall, core profit came within our/consensus estimates at 21%/23%.

• Malaysia operations remains steady with higher revenue per patient while the Indonesia operations turned positive on higher patient count and better cost containment.

• First interim dividend of 0.5sen (vs 1Q18: 0.5 sen) was declared, implying a 10% payout to EPS which is within expectation.

• Maintain Hold with SOP-derived TP of RM1.00 which implies FY19F PE of 21x. Exercising caution over potential earnings dilution on new hospitals gestation period, we believe long-term prospect is promising on resilient demand for quality private healthcare and ongoing efficient cost management initiative. Add on weakness.

1Q19 earnings within expectation

Core profit of RM44m fell 9.4% qoq and 4.5% yoy due to higher depreciation charge on expansion resumption and tax expense. Effective tax rate rose to 34.5% (+8.3ppt qoq and +5.7ppt yoy) due to tax provision made as well as non-allowable tax deductibles claimed. Overall, core profit was in-line with ours/consensus estimates at 21%/23% respectively.

Steady Malaysia operations growth

Malaysia operations revenue grew 0.4% qoq and 5% yoy on higher revenue per patient. Total revenue per patient rose by 2.2% qoq and 5.7% yoy despite volume dropped by 1.8% qoq and 0.4% yoy (Table 3). We believe this was largely due to mild price increments, increased complex cases per inpatient and surgeries especially for KPJ Rawang, Pasir Gudang and Johor.

Positive turnaround from Indonesia operations

Indonesia operations have turned positive. The PBT of RM1.4m was due to i) higher number of patients contributed by aggressive marketing activities and treatment packages introduced, ii) lower operational cost from better efficiencies and iii) lower forex loss on appreciation of Rupiah. Moving forward, the on-going business realignment to enhance service offerings by targeting more private patients would improve Indonesia operations.

Maintain HOLD with TP of RM1.00

Going forward, we expect further revenue improvements from new hospital openings in 2019 (KPJ BDO, Kuching and Miri) as well as from more matured hospitals and resilient demand for quality private healthcare amidst the backdrop of an aging nation. However, we remain cautious over potential earnings dilution from gestation period of new hospitals. Maintain hold with SOP-derived TP of RM1.00 (WACC: 7.3%, TG: 1%). Risks to our call are: i) lower inpatient volume, ii) higher cost than expected.

Source: BIMB Securities Research - 3 Jun 2019