KPJ’s 9H18 PATAMI of RM126.5m (+26.5% YoY) was within ours and consensus expectations driven by cost optimization and higher revenue intensity cases. Operating statistics exhibited growth YoY due to the ramping up of newly opened hospitals and organic growth. KPJ is a key beneficiary of the B40 healthcare fund due to its wide geographic footprint. Maintain our forecast and SOP based TP of RM1.27. Maintain BUY.

Inline. 9M18 revenue of RM2, 444.7m translated into PATAMI of RM126.5m, making up 67.8% of HLIB and 70.2% of consensus expectations. We deem the results to be inline as the 4Q has historically accounted for the group’s strongest quarter making up between 32%- 38% of full year earnings.

Dividend. Declared a third interim dividend of 0.5sen/ share (YTD: 1.5 sen/share; FY17-YTD: 1.4sen/share)

QoQ. Revenue improved by 2.4% to RM820.6m on improved outpatient (+5.4%) and inpatient (+7.8%) volumes. Subsequently, EBITDA improved by 0.4% to RM119.3m inline with topline growth. EBITDA margins were flattish at 14.5%. PATAMI was marginally lower at RM41.7m (-2.1%) due to a higher effective tax rate (32%) during the quarter owing to non-deductible expenses.

YoY. Revenue grew 4.1% YoY (from RM788.4) namely driven by higher inpatient (+3.7%) and outpatient (+2.4) traffic as the group ramps up its operations of newer hospitals and organic growth. EBITDA grew 10.7% (from RM98.1m) driven namely by the groups cost optimization which has seen COS marginally increasing by 1.1% YoY. Consequently, EBITDA margins improved by 0.8ppts whilst PATAMI grew by 33.9% on higher operating leverage as newly opened hospitals start hitting their sweet spot.

YTD. Revenue grew 4.2% YoY to RM2,444.2.8m (from RM2,346.3m) namely driven by higher inpatient (+2.5%) and outpatient traffic (+2.4%) 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 14.5% YoY RM354.8m whilst margins improved by 1.3 ppts to 14.5% on better cost optimization. Subsequently, PATAMI grew by 25.2% to RM126.5m on better operating leverage.

Forecast. Unchanged.

Maintain BUY, TP: RM1.27. Maintain our SOP based TP of RM1.27. Our TP implies FY19-20 EV/EBITDA of 12.6x-11.8x. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. We can expect a seasonally stronger 4Q18 in tandem with KPJ’s historical trend. Its niche lies in its regional hospital network that feeds patient into its urban specialist centres. KPJ is also a key beneficiary of the B40 Health Protection Fund due to its wider geographic footprint.

Source: Hong Leong Investment Bank Research - 30 Nov 2018