KPJ’s FY18 core PATAMI of RM170.7m (+3.1% YoY) was below ours and in line with consensus expectations. Operating statistics exhibited growth YoY due to the ramping up of newly opened hospitals and organic growth. We revise our FY19-20 downwards by 5.3%-6.7% as we recalibrate our OP and IP revenue and MI assumptions in tandem with the reported results. Post earnings adjustment our SOP based TP of reduces to RM1.19. Maintain BUY.

Slightly below. FY18 revenue of RM3,308.1m translated into core PATAMI of RM170.7m, making up 92% of HLIB and 95% of consensus expectations. The results were slightly below due to (i) a slight mismatch in our IP and OP revenue growth assumptions YoY (ii) higher finance costs (+12.1%) and (iv) higher MI as the group pared down its stake in Lablink to 51% to Quadria capital (from 100%). In deriving our core earnings, we have adjusted for EIs amounting to RM10.9m due to FV gains on investment properties.

Dividend. Declared a final interim dividend of 0.5sen/ share going ex- on 27th March (YTD: 2.0 sen/share; FY17: 1.8sen/share).

QoQ. Revenue improved by 5.2% to RM820.6m on improved OP (+2.7%) and IP (+5.0%) volumes. EBITDA grew 25% to RM148.3m, adjusting for FV gains of c.RM10.9m from investment properties. EBITDA grew a commendable 15.6%, whilst margins improved by 1.4ppts to 15.9% QoQ, driven by the higher case episodes and better cost management. Core PATAMI grew to RM45.2m (8.5%) in tandem with EBITDA growth.

YoY. Revenue grew 3.6% YoY (from RM833.7) namely driven by higher IP (+10.9%) and OP (+5.9%) traffic as the group ramps up its operations of newer hospitals and organic growth. This resulted in EBITDA growth of 10.8% (from RM124.0m), whilst EBITDA margins improved by 1.0ppts (15.9%). Core PATAMI declined by 27% due (i) to a higher effective tax rate (28% vs 17% YoY) owning to non-deductible expenses and revised tax payables for certain companies resulting from profit improvement within the group, (ii) higher finance cost (+21.8%) YoY- higher capex purchases and (iii) higher MI (+81%) resulting from Lablink’s partial disposal.

YTD. Revenue grew 4.0% YoY to RM3,308.1m (from RM3,180.0m) namely driven by higher Malaysian IP (+4.6%) and OP traffic (+2.7%) 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 11.4% YoY to RM492.2m whilst margins improved by 1.0 ppts to 14.9% on better cost optimization and greater revenue intensity. Subsequently, PATAMI grew by 3.1% to RM170.7m on better operating leverage.

Forecast. We revise our FY19-20 downwards by 5.3%-6.7% as we recalibrate our OP and IP revenue and MI assumptions in tandem with the reported results.

Maintain BUY, TP: RM1.19. Post earnings adjustment our SOP based TP of reduces to RM1.19 (from RM1.27). Our TP implies FY19-20 EV/EBITDA of 12.6x-11.9x. 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. KPJ is a long term beneficiary of the B40 healthcare theme due to its wider geographic footprint.

Source: Hong Leong Investment Bank Research - 20 Feb 2019