KPJ’s 1Q18 PATAMI of RM42.2m (+5.4% YoY) was within expectations. Operating statistics exhibited growth YoY due to the ramping up of newly opened hospitals and organic growth. Our forecasts are revised downwards for FY18-20 due to model upkeep post release of annual report. Our SOP based TP marginally increases to RM1.24 (from RM1.18) as we roll our valuations horizon into FY19. Maintain BUY on share price weakness.

In line. 1Q18 revenue of RM822.9m translated into PATAMI of RM42.2m, making up 23.2% of HLIB and 24.1% of consensus full year expectations. We deem the results to be broadly in line with expectation as 1Q is a seasonally weaker quarter.

Dividend. Declared single tier interim dividend of 0.5sen/share (1Q17:0.55 sen/share).

QoQ. Revenue declined by 1.3% to RM822.9m attributed to seasonality and weaker contribution from Indonesia. EBITDA declined by 6.0% to RM116.6m on the back of lower operating leverage during the quarter. Consequently, EBITDA margins declined by 0.7ppts to 14.2%. PATAMI declined by 30% to RM42.2m on the back of high base effect in 4Q17 and stronger contributions from associates.

YoY. Revenue grew 5.6% YoY to RM822.9m (from RM779.2) namely driven by higher Malaysian inpatient and outpatient traffic due to the ramping up of operations ( KPJ Rawang , KPJ Maharani, KPJ Klang, KPJ Pasir Gudang and KPJ Tawakkal) and a better case mix. Subsequently, PATAMI grew by 5.4% in tandem with the top line growth.

Operating statistics. (i) Patient volume: Inpatient volumes improved by 5.2% YoY (7.9% QoQ) whilst outpatient volumes improved by 4.1% YoY (4.6% QoQ) on the back of the ramping up of newly opened KPJ hospitals. (ii) Revenue per patient:

Revenue per inpatient grew by 0.4% YoY (-5.1% QoQ) whilst revenue per outpatient grew 1.5% YoY (-0.6% QoQ). The YoY expansion was principally driven by organic growth.

Forecast. Our FY18-20 earnings are revised downwards by 0.2%, 1.1% and 1.2%% on model up keeping, post release of the latest audited annual report.

Maintain BUY, TP: RM1.24. Despite the earnings cut, our SOP based TP increases to RM1.24 (from RM1.18) as we roll forward our valuation horizon from FY18 to FY19. Our TP implies FY19-20 EV/EBITDA of 12.6x-10.6x. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. Its niche lies in its regional hospital network that feeds patient into its urban specialist centres. Given the recent share price volatility, we advise investors to accumulate.

Source: Hong Leong Investment Bank Research - 31 May 2018