KPJ’s 1Q21 core PATMI of RM12.8m (QoQ: -74.1%, YoY: -66.6%) was bellow ours and consensus expectations, at 7.8% and 7.6% of full year forecasts respectively, which was due to lower-than-expected patient volumes. We lower our FY21/22 earnings forecasts by 13.6%/1.4% after factoring in the earnings miss and sluggish earnings expected in 2Q21. After tweaking our SOP valuation methodology (reduce our EV/EBITDA multiple from 13x to 12x to reflect earnings uncertainty from spiking Covid-19 cases and MCO3.0) and factoring lower forecasts, our TP falls from RM1.12 to RM1.01. Downgrade to HOLD from Buy.

Below expectations. 1Q21 core PATMI of RM12.8m (QoQ: -74.1%, YoY: -66.6%) was bellow ours and consensus expectations, at 7.8% and 7.6% of full year forecasts respectively. The results shortfall was due to lower than expected patient volumes.

Dividend. No dividend was declared in 1Q21. 1Q20: 0.5 sen DPS

QoQ. Re-imposition of MCO in Jan-21 (1Q21) resulted in lower number of inpatients (-11%) and outpatients (-7%). Lower patient numbers resulted in revenue decreasing -2.6%. Core PATAMI dived -74.1% from (i) lower topline (ii) fixed cost component (staff cost, D&A, finance costs etc.) and (iii) recognition of tax credits in 4Q20.

YoY. Decline in patient numbers (-4%) in both Malaysia (-4%) and Indonesia (-8%) was due to lockdown measures implemented in 1Q21 (note that 1Q20 had 2.5 months free of MCO restrictions). This resulted in revenue decreasing by -9.0%. While KPJ shared their bed occupancy rate (BOR) was just 39% in 1Q21 (vs. 65% in FY20), one bright spot came from Jeta Gardens, which reported occupancy of 86% (from 80% in 1Q20). Core PATAMI declined (-66.6%) by an even greater quantum than revenue fall due to the fixed portion of costs as mentioned above.

Outlook. We understand that patient numbers in 1Q21 bottomed in Feb-21 at 203.6k patients and improved to 262.8k patients in Mar-21 after the launch of the national immunisation program. However, we expect earnings to continue to be sluggish in 2Q21 due to the spiking Covid-19 cases of Malaysia and recently implemented MCO restrictions.

Forecast. We lower our FY21/22 earnings forecasts by 13.6%/1.4% after factoring in the earnings miss and sluggish earnings expected in 2Q21.

Downgrade to HOLD, TP: RM1.01. We tweak our SOP valuation methodology (reduce our EV/EBITDA multiple from 13x to 12x) to reflect the less than certain earnings outlook with the recently implemented MCO restrictions and spiking Covid - 19 cases. Post forecast adjustments and changes to our SOP valuation methodology, our TP falls from RM1.12 to RM1.01. With the expected sluggish occupancy rates in 2Q21, we downgrade KPJ to a HOLD from Buy.

Source: Hong Leong Investment Bank Research - 27 May 2021