KPJ’s 3QFY19 core PATMI of RM47.7m (+10.7% QoQ, +14.4% YoY) brought 9MFY19 core PATMI to RM131.0m (+3.60% YoY). We deem the results inline given expectations of a seasonally stronger 4QFY19. YTD improvement was boosted by improved performance from Malaysia (+7% YoY) and Others segment (+14% YoY) with a revenue per inpatient growth of +7.2% YoY. Maintain our forecast and BUY call. Our SOP based TP increased to RM1.24 (from RM1.18) as we roll forward to FY20.

Inline. 3QFY19 core PATMI of RM47.7m (+10.7% QoQ, +14.4% YoY) brought 9MFY19 sum to RM131.0m (+3.6% YoY). The results came in line at 68% of HLIB and 70% of consensus estimates. 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 0.5 sen per share going ex on 30 January 2020. (9MFY19: 1.5 sen per share; 9MFY18: 1.5 sen per share)

QoQ. Revenue grew to RM906.4m (+7.0% QoQ) attributed to the 6% increase in number of patients. EBITDA remained flat due to higher cost of sales (+2.6%) and higher admin and other operating expenses (+26.2%). With lower finance costs, core PATAMI increased by 10.7% to RM47.7m.

YoY. Revenue was lifted (+10.5% YoY) backed by improved performance from Malaysia (+10%) and Others segment (+16%). Malaysia segment improved thanks to (i) increase in number of patient visits, radiology cases and surgeries especially in KPJ Rawang, KPJ Selangor and KPJ Johor, (ii) new addition of KPJ Batu Pahat (18 September 2019). Others segment improvement was mainly due to 21% increase in patients in Rumah Sakit Medika Bumi Serpong Damai thanks to consecutive marketing activities and treatment packages introduced. Reported EBITDA grew 29.9% (from RM119.3m) whilst margins expanded 2.6ppts (from 14.5% to 17.1%) on the back of improved revenue intensity (revenue per inpatient grew +3.7% YoY). Meanwhile core PATMI increased by 14.4% due to the lower tax effective rate of 29% (3QFY18: 32%).

YTD. Revenue of RM2,621.9m showed improvement of 7.2% (9MFY18: RM2,444.8m) contributed by Malaysia (+7%) and Others segment (+14%). EBITDA grew 31.0% (from RM354.8m) whilst margins expanded 3.2ppts to 17.7% from 14.5% thanks to better revenue intensity (+7.2% revenue per inpatient growth). Core PATAMI increased by a lower magnitude of 3.6% on slightly higher tax effective rate (+2.7 ppts YoY from 26.9% to 29.6%).

Outlook. We can expect a seasonally stronger 4QFY19 in tandem with KPJ’s historical trend (32%-38% of full year earnings). Also with the new addition of KPJ Batu Pahat (18 September 2019), along with newly opened hospitals KPJ Perlis and KPJ Bandar Dato’ Onn, this should drive revenue.

Forecast. Unchanged.

Maintain BUY, TP: RM1.24. Our SOP derived TP increases to RM1.24 (from RM1.18) as we roll forward to FY20. Our TP implies FY19-20 EV/EBITDA of 14.3x and 13.3x. We like KPJ as it offers investors exposure to a pure Malaysian hospital play; its niche lies in its domestic geographical hospital network spread that feeds patient into its urban specialist centres.

Source: Hong Leong Investment Bank Research - 5 Dec 2019