KPJ’s 1H21 core PATAMI of RM19.9m (YoY: -61.1%) was below ours and consensus expectations, at 14.0% and 16.6% of full year forecasts respectively. The results shortfall was due to higher than expected costs associated with Covid-19 offerings and expenses from new hospitals under gestation period. We lower our FY21/22/23 earnings forecasts by 27.2%/5.0%/2.2%. We lower our TP from RM1.01 to RM0.95 based on an unchanged SOP valuation methodology. Maintain HOLD.

Below expectations. 2Q21 core PATMI of RM7.0m (QoQ: -45.5%, YoY: -41.1%) brought 1H21’s sum to RM19.9m (YoY: -61.1%) which was bellow ours and consensus expectations, at 14.0% and 16.6% of full year forecasts respectively. The results shortfall was due to higher than expected costs associated with Covid-19 offerings and expenses from new hospitals under gestation period.

Dividend. Declared DPS of 0.25 sen goes ex on 23 Sep 21 (1H21: 0.25). 2Q21: 0.30 sen. 1H20: 0.30 sen DPS.

QoQ. Revenue was up slightly (+4.4%) due to increased number of patients (+6%). KPJ continued to admit Covid-19 patients, provide vaccination services at 25 PPVs under the National Immunisation Program (NIP) and take in non-Covid-19 patients from public hospitals. However, core PATAMI declined -45.5% due to (i) higher costs from newer Covid-19 related revenue streams mentioned above, (ii) additional D&A from additional new beds, new medical equipment and upgrading facilities at existing hospital KPJ Sri Manjung and opening of KPJ Taiping in 2Q21. KPJ guided that the high fixed costs associated with running a new hospital during the MCO period remains a challenge.

YoY. Revenue was up by +33.0% from higher bed occupancy rate (2Q21: 41% vs. 2Q20: 35%). Despite higher patient numbers, core PATAMI shrank 41.1%, given that a larger portion of patients were Covid-19 patients and non-Covid-19 patients decanted from public hospitals, which have slimmer margins.

YTD. Higher patient visits of 1.4m represented a 17% increase, which resulted in revenue rising 8.5%. Despite this, losses from new hospitals under gestation period as mentioned above resulted in core PATAMI decreasing 61.1%

Outlook. Despite recent relaxation of MCO rules, we believe that the number of higher value patients such as those seeking elective surgery will continue to remain sluggish with the stubbornly high Covid-19 cases. While we are positive on KPJ’s efforts in providing Covid-19 related services such as treatment of Covid-19 patients, Covid-19 testing, and providing vaccination services as part of the NIP, we understand these ventures have lower margins.

Forecast. We lower our FY21/22/23 earnings forecasts by 27.2%/5.0%/2.2% to account for slower turnaround in high value patients.

Maintain HOLD, TP: RM0.95. After our earnings adjustment, we lower our TP from RM1.01 to RM0.95 based on an unchanged SOP valuation methodology (Figure #1). While KPJ’s various Covid-19 related efforts are a welcome venture, we believe KPJ’s profitability will likely only see a meaningful recovery when Covid-19 cases decline to more comfortable levels.

Source: Hong Leong Investment Bank Research - 25 Aug 2021