KPJ’s 9M2017 net profit increased by 4.1% yoy to RM101m and accounted for 66% of our full-year estimate - largely in line with our expectations. We see the 3% growth in both inpatient and outpatient volume in 3Q17 as an encouraging sign of a recovery, lifting revenue growth by 5% yoy. The opening of new hospitals is on track, except for a slight delay with KPJ Miri. We believe that KPJ’s growth in 2018 will be driven by a recovery in patient numbers, new hospital openings, and pricing revision. Maintain BUY with a slightly higher TP of RM1.22, as we roll forward our valuation horizon to FY18E.

3Q17 Results Broadly in Line

3Q17 revenue increased by 5% yoy to RM803m on the back of a 3% yoy growth in both outpatient and inpatient growth. The average revenue/patient increased marginally by 2%, but we expect it to deliver mid-single digit growth driven by pricing revision and a better patient mix. During the quarter, the Malaysia operation’s EBTDA margin was softer at 13.8% vs 14.2% in 3Q16, which we think could be attributed to the preopening cost incurred for the upcoming KPJ Perlis opening in 4Q17. Both the Indonesia and Australia operations showed improvement and delivered a combined EBITDA of RM2.3m vs. an EBITDA loss of RM1.5m in 3Q17. 9M17 net profit of RM101m accounted for 66% of our full-year estimate. We view this as largely in line as we expect better patient volume qoq and the new KPJ Perlis opening in 4Q17 to contribute to the top line.

New Hospital Openings on Track

KPJ’s new hospital openings are still within the expected schedule, except for Miri. The 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 4Q18 instead of 2Q18) and 150-bed KPJ Kuching Specialist (opening in 3Q18) are expected to provide inorganic growth from FY18.

Maintain Buy With Unchanged 12M TP of RM1.22

We maintain our Buy call, rolling forward our valuation to FY18E for a higher SOTP-based TP of RM1.22. 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 a low base, and 4) attractive valuation vs. regional peers (average: 30x FY17E PE). Downside risks: (1) margin compression; and (2) declines in patient volume.

Source: Affin Hwang Research - 24 Nov 2017