KPJ’s 1H2017 net profit increased by 9.2% yoy to RM70.4m and accounted for 46% of our full year estimates, which was largely in line with our/consensus expectations. Higher inpatient volume growth of 3% yoy in 2Q17 after 4 quarters of muted growth is an encouraging sign, lifting 2Q17 revenue growth by 4% yoy. The opening of 4 new hospitals within the next 12 months is still on track. We maintain our Buy rating with a TP of RM4.71 as we like the private healthcare spending recovery and new hospital openings to provide top line growth.

2Q17 Results in Line With Expectations

2Q17 revenue increased by 4% yoy to RM 793m. The total patient volume growth declined by 1% yoy marginally, but inpatient volume grew by 3% yoy compared to a 1% yoy decline in outpatient volume, resulting in better patient mix and higher average revenue/patient of RM1,152 (+4% yoy). 2Q17 EBITDA increased by 6% yoy to RM90m as KPJ sees improvement in EBITDA margin across all countries of operations. EBITDA in Malaysia operation increased by 6.5% yoy due to turnaround of new hospitals while Indonesia and Australia operations’ EBITDA increased by 64% yoy and 28% yoy respectively, due to higher utilisation of facility and improved economies of scale. 1H17 net profit accounted for 46% of our full year estimates. Patient volume growth in 2H17 could be better on the back of improving consumer sentiment. Management is also looking for an adjustment to medical fees in 2H17, which should be positive to earnings.

Updates on New Hospital Openings

KPJ’s 4 new hospital openings are still within the expected schedule. 90- bed KPJ Perlis (opening in 4Q17), 150-bed KPJ Specialist Hospital Bandar Dato’ Onn (opening in 2Q18), 96-bed KPJ Miri Specialist Hospital (opening in 2Q18) and 150-bed KPJ Kuching Specialist (opening in 3Q18) are expected to provide inorganic growth from FY18 onwards.

Maintain Buy With Unchanged TP of RM4.71

We maintain Buy with an unchanged SOTP-based 12 month TP of RM4.71. We continue to like KPJ for its: (1) strong expansion plans; (2) exposure to the Malaysian private healthcare market (Malaysia’s aged population growth of 5%), (3) recovery from low base, and 4) attractive valuation among regional peers (30x FY17PE). Key downside risks for KPJ would be: (1) margin compression; and (2) declines in patient volume.

Source: Affin Hwang Research - 25 Aug 2017