KPJ Healthcare (KPJ) delivered a good set of results which was in-line with our and consensus expectations. 9M18 core net profit grew 21% yoy to RM126.5m, on the back of higher patients and improved margins. Regional results were mixed sequentially, with losses narrowing for its Indonesian operations while widening for its Australian aged-care facility, which is targeted to be sold by 1H19. Going forward, commencement of new hospitals over the coming quarters will sustain its earnings growth momentum. Maintain BUY with a TP of RM1.30.

9M18 Core Earnings Within Expectations

KPJ’s 9M18 core earnings registered a yoy growth of 21% to RM126.5m, which we deem to be within our and consensus estimates at 69% and 70% of full year forecasts respectively. The strong growth was underpinned primarily by an increase in patient visitation (outpatients: +1.5% yoy, inpatients +2.6%), with average revenue per bed increasing by 8.4% yoy. Yoy margin improvements was also driven by cost rationalisation initiatives and better case mix, in line with the growth of inpatient visitations. Sequentially, 3Q18 also recorded additional beds and higher number of surgeries performed. Notably, Indonesia’s pretax losses narrowed convincingly to –RM0.4m (vs RM1.8m in 2Q18) on the back of higher revenue after weathering the price cap policy that caused significant losses in 4Q17.

New and Expanded Hospitals Underway

KPJ Specialist Hospital Bandar Dato’ Onn (150-bed) has been completed in 3Q18 and is slated to open in 4Q18, which will initially increase total capacity by 30 operating beds to 3090 operating beds. Separately, Phase 1 of the expanded KPJ Johor has also commenced in 3Q18 with a capacity of 40 operating beds. Moving forward, the new hospitals in Miri (96-bed) and Kuching (150-bed), alongside the expanded KPJ Seremban (90-operating bed) are set to open in 2Q19 and 1Q19 respectively.

Maintain Buy and TP of RM1.30

We maintain our BUY rating on KPJ based on SOTP-derived TP of RM1.30, while leaving earnings forecasts intact. 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 - 30 Nov 2018