KPJ’s 1Q19 PATAMI of RM40.3m was within our expectations. Adjusting for MFRS16 – EBITDA still grew an impressive 13.1% YoY, whilst margins improved by 1ppts to 15.2% attributable to the groups cost optimization initiatives and higher revenue intensity cases as exhibited by average revenue per inpatient improving by +9.7% YoY. Our SOP based TP of inches downward to RM1.18 (from RM1.19) on model up-keeping. Maintain BUY.

Inline. 1Q19 revenue of RM868.1m translated into PATAMI of RM40.3m, making up 21% of HLIB and consensus estimates. We deem the results to be inline as the 4Q has historically accounted for the group’s strongest quarter making up between 38%- 32% of full year earnings.

Dividend. Declared first interim dividend of 0.5sen/ share (1Q18: 0.5 sen/share;) going ex on 18th of June.

QoQ. Revenue improved by 1.0% to RM868.1m on improved sustained organic growth from existing hospitals and contributions from newly opened ones. Reported EBITDA increased by 13.2% QoQ attributed to MFRS 16. Adjusting for MFRS 16, core EBITDA declined marginally by -3.6% QoQ. PATAMI was lower at RM40.3m (- 8.8% QoQ) due to a higher effective tax rate (32% vs. 28% in 4Q18) during the quarter owing to (i) non-deductible expenses (ii) non-recognition of deferred tax assets arising from unutilised capital allowances and (iii) tax losses of a newly-opened companies.

YoY. Revenue grew 5.5% YoY (from RM822.9m) namely driven by higher inpatient (+4.4%) and outpatient (+9.7%) traffic as the group ramps up its operations at newer hospitals. Reported EBITDA grew 32.8% (from RM116.1m) whilst margins expanded 3.7ppts to 17.8% from 14.2%. Adjusting for MFRS16 – EBITDA still grew an impressive 13.1%, whilst margins improved by 1ppts to 15.2% attributable to the groups cost optimization initiatives and higher revenue intensity cases as exhibited by average revenue per inpatient improving by +9.7% YoY . PATAMI declined slightly by 4.5% on higher tax rates and finance costs (+23%).

Forecast. Post release of the annual report our FY19-20 EPS adjusts downwards by 3.0%-0.3% on model up-keeping. We introduce our FY21 numbers.

Maintain BUY, TP: RM1.18. Our SOP based TP of inches downward to RM1.18 (from RM1.19) on model up-keeping. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. Our TP implies FY19-20 EV/EBITDA of 13.8x-12.8x. We feel that the valuation discount between KPJ and its global market exposed peers warrants a reassessment. The risk to reward has skewed more towards KPJ’s favour, in view of its lacking presence internationally and thus lack off exposure to external volatility.

Source: Hong Leong Investment Bank Research - 3 Jun 2019