KPJ’s 2Q19 core PATAMI of RM43.1m (+6.8% QoQ, +1.1% YoY) brought 1H19 core PATAMI to RM83.4m (-1.7%). The result was within our expectations. YTD revenue improves mainly due to ramp up from newly opened hospitals (and organic growth) and Others segment (additional 12 beds in Rumah Sakit Medika Bumi Serpong Damai and overall increase in patients). We maintain our forecasts and SOP based TP of RM1.18. Maintain BUY.

Inline. 2Q19 core PATAMI of RM43.1m (+6.8% QoQ, +1.1% YoY) brought 1H19 sum to RM83.4m (-1.7% YoY). The results came in line at 44% of HLIB and consensus estimates. We deem the results to be inline as the 4Q has historically been the group’s strongest quarter making up between 35%- 38% of full year earnings.

Dividend. Declared a second interim dividend of 0.5sen/ share (1Q19: 0.5 sen/share;) going ex on 23rd of September.

QoQ. Revenue came in flattish at RM847.3m (-2.4% QoQ) attributed to seasonality due to the festive season in the quarter review (which saw inpatient volumes decreasing by 11.3%). EBITDA remained flat due to higher D&A, lower other income (-32.7%) despite lower cost of sales (-0.8%) as well as admin and other operating expenses (-8.9%). However, core PATAMI increased by 6.8% to RM43.1m due to a lower effective tax rate (28% vs. 32% in 1Q19) paired with lower net finance costs (- 8% QoQ).

YoY. Revenue grew 5.7% YoY (from RM801.3m) namely driven by better performance from Malaysia (+6%) and Others segment (+13%). Malaysia segment improved thanks to (i) increase in number of patient visits especially in KPJ Rawang, KPJ Pasir Gudang and KPJ Johor and to a lesser extent (ii) newly opened KPJ Perlis and KPJ BDO. Others segment improvement mainly due to (i) additional 12 beds in Rumah Sakit Medika Bumi Serpong Damai and (ii) overall increase in number of patients contributed by consecutive marketing activities and treatment packages introduced. Reported EBITDA grew 30.4% (from RM118.8m) whilst margins expanded 3.5ppts (from 14.8% to 18.3%) on the back of improved revenue intensity (revenue per inpatient grew 8.4% YoY). Core PATAMI increased slightly by 1.1% due to the recognition of lease liabilities of RM15.9m due to MFRS 16, and higher tax expense (+31.4%) despite finance costs coming in flattish YoY (+2%).

YTD. Revenue of RM1,715.4m showed improvement of 5.6% (from RM1,624.2m) contributed by Malaysia (+5%) and Others segment (+13). EBITDA grew 26.9% (from RM235.4m) whilst margins expanded 2.9ppts to 17.4% from 14.5% thanks to better revenue intensity (+9.1% revenue per inpatient growth). Core PATAMI declined slightly by 1.7% on higher tax rates (+6 ppts YoY from 24.2% to 30.2%).

Forecast. Maintain.

Maintain BUY, TP: RM1.18. Maintain BUY and TP of RM1.18. Our TP implies FY19- 20 EV/EBITDA of 11.3x – 10.5x. 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 predominantly local presence and thus, lack off exposure to external volatility.

Source: Hong Leong Investment Bank Research - 3 Sept 2019