KPJ’s 3Q16 core earnings of RM32.5m was below consensus expectations. This was mainly due to lower earnings contribution from the Malaysian operation as patient volume in 3Q16 remains weak (-1%yoy) and increase in depreciation from newly opened hospitals. We make no changes to our 2016-18 earnings forecasts pending our meeting with KPJ’s management. Maintain BUY rating on the stock with an unchanged target price of RM5.01.

3Q16 results below expectations

KPJ’s 9M16 net profit were below expectations, accounting for 66% and 68% of our and consensus 2016 estimates respectively. 3Q16 revenue increased by 6% because of higher average revenue/patient of RM1,140.10(+8%yoy). The overall demand was still weak as outpatient number decreased by 1% yoy and inpatient number was flat yoy. EBITDA margin declined slightly to 11.50% (compared to 12.50% in 3Q15) and the management stated it was attributable to increase in material costs. Core net profit of RM32.5 (-15%yoy) resulted from increase in depreciation and finance costs from newly opened hospitals, including KPJ Sabah and KPJ Pahang. Also, KPJ declared 2nd interim dividend of 1.5 sen per share.

Maintain BUY and TP of RM5.01

We make no changes to our 2016-18 earnings forecasts pending our meeting with KPJ’s management. As such, our 12-month SOTP-derived target price is unchanged at RM5.01. We continue to like KPJ for its: (1) strong expansion plan; (2) exposure to the Malaysian private healthcare market (Malaysia’s aged population had CAGR of 3.8% in 1980-2015, second fastest among the countries in our analysis); and (3) cheap valuation among regional peers. We maintain our BUY recommendation on the stock

Source: Affin Hwang Research - 1 Dec 2016