While patient volume recovery slowed due to seasonality factors, sustainable margin gains supercharged earnings. We continue to like KPJ for its encouraging revenue intensity recovery against the backdrop of dissipating foreign risk factors. KPJ’s balance sheet should comfortably support the aggressive expansion pipeline of hospitals. Compelling 2Q18 operating metrics reaffirm our outlook on KPJ. Maintain BUY with a TP of RM1.30.

2Q18 Results Are in Line With Our Expectations

2Q18 revenue increased by 3% yoy amid higher revenue per patient (+5% yoy). This more than offset lower patient volume (-2% yoy), which was dragged by seasonal Raya celebrations falling in the quarter. EBITDA margin for the quarter improved impressively by 2.6ppt to 13.9% despite occupancy rates dropping to 61% (vs. 2Q17: 68%). This was primarily attributed to cost rationalisation initiatives at newer hospitals and higher margin inpatient cases. Indonesia reported minimal losses of -RM1.8m, having weathered the price cap policy that precipitated sharp losses in 4Q17 of -RM9.0m. Improved margins for the quarter ultimately supplemented KPJ’s 2H18 net profit to registered a yoy growth of 15.6% to RM84.8m, in line with ours but exceeded consensus estimates (46% of our and 48% of consensus full-year estimates).

Positioning Aggressive Network Expansion for the Future

We revise our margin assumptions to reflect the sustainable nature of the margin gain. In terms of patient volumes, we expect 2H18 growth to outpace 1H yoy growth but still short of our estimates, to which we downward adjust. Ultimately, we maintain our earnings but trim our FY18-20E revenue forecast - 4%-7%. Apart from the improved near term outlook, KPJ is well poised to capture the structural change in demographics with its expansion outlook. Firmed greenfield expansion plans include 4 new hospitals and 3 hospital expansions, translating to 18% and 8% of additional operating beds over FY18-19E respectively. KPJ’s strong FY19E debt service coverage ratio of 7.2x should allay concerns over its high gearing level (2Q18: 75%).

Maintain Buy and TP of RM1.30

KPJ currently trades at 23.6x and 11.1x, its forward P/E and EV/EBITDA respectively. Both multiples are at a discount to its 3-year historical mean. There is still a huge laggard between KPJ’s improving prospects. We maintain our BUY rating and our SOTP-derived TP to RM1.30. We like KPJ for its: (1) diminishing risk factors, Indonesia and Jeta Gardens, (2) improved industry prospects and (3) attractive valuations. Downside risk: (1) spike in cost, (2) delayed corporate exercise and (3) slower-than-expected recovery in patient volume.

Source: Affin Hwang Research - 17 Aug 2018