KPJ’s 1H18 PATAMI of RM84.8m (+18.9% YoY) was within our expectations driven namely by cost optimization and an increase in cases with higher revenue intensity. Operating statistics exhibited growth YoY due to the ramping up of newly opened hospitals and organic growth. We adjust our FY18-20 forecast upwards by 3.6%-0.2% on better cost optimization and the impact of the tax holiday in 3Q18. Our SOP based TP increases to RM1.27. Maintain BUY.

Inline. 1H18 revenue of RM1624.2m translated into PATAMI of RM84.8m, making up 47.1% of HLIB and 47.3% of consensus expectations. We deem the results to be broadly in line with expectation as 1H is seasonally weaker historically.

Dividend. Declared a second interim dividend of 0.5sen/ share (YTD: 1 sen/share) representing a pay-out of 51.8%, yielding 0.88%.

QoQ. Revenue declined by 2.6% to RM801.3m attributed to seasonality and weaker contributions from Indonesia. Despite this, EBITDA improved by 1.9% to RM118.8m as revenue intensity increased on the back of more surgeries performed during the quarter, manifest by the higher revenue per inpatient (+0.8%) despite inpatient volumes declining 9.1% QoQ. Consequently, EBITDA margins improved by 0.6ppts to 14.8%. PATAMI was flattish at RM45.0m as the group paid more Zakat during the quarter.

YoY. Revenue grew 3.0% YoY to RM801.3m (from RM778.6) namely driven by higher inpatient and outpatient traffic as the group ramps up its operations of newer hospitals and organic growth. EBITDA grew 21.1% to RM118.8 (from RM98.1m) driven by complex cases with higher revenue intensity (+3.1% YoY) and cost optimization at newer hospitals as they transcend their gestation period and operations begin to “normalize”. Subsequently, PATAMI grew by 27.9% in tandem with EBITDA velocity.

YTD. Revenue grew 4.3% YoY to RM1624.2.3m (from RM1557.8m) namely driven by higher Malaysian inpatient (+1.7%) and outpatient traffic (7.3%) due to the ramping up of operations (KPJ Rawang , KPJ Maharani and KPJ Pasir Gudang) as well as better case mix and higher surgeries undertaken. EBITDA grew 16.5% RM235.4m whilst margins improved by 1.5 ppts to 14.5% on better cost optimization and a stronger RM YTD which has resulted in margin improvement from its cost of sales (drugs and consumables). Subsequently, PATAMI grew by 15.6% to RM84.8m in tandem with the EBITDA growth and stronger associate contributions (+17% YoY).

2H18 outlook. Despite the expectations of a seasonally stronger 2H, we believe that margins could surprise on the upside, especially in 3Q as the impact of the tax holiday is manifest.

Forecast. We adjust our FY18-20 earnings upwards by 3.6%-0.2% as we adjust our cost assumptions downwards due to (1) the impact of the tax holiday in 3Q and (2) better cost optimization for the group moving forward.

Maintain BUY, TP: RM1.27. Our SOP based TP increases to RM1.27 (from RM1.24). Our TP implies FY19-20 EV/EBITDA of 11.3x-10.5x. 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. Expect the tax holiday impact to further shore up margins in 2H18.

Source: Hong Leong Investment Bank Research - 17 Aug 2018