KPJ Healthcare (KPJ) recorded a core net profit of RM181.6m (+10% yoy) for 2018 – in line with our and consensus expectations. Earnings growth was mainly attributed to the continued growth in patient volumes and improved margins, especially for Malaysian operations. KPJ declared an interim dividend of 0.5sen, bringing full-year DPS to 2.0sen, or a payout ratio of 47% (2017: 1.78sen at 45%). We maintain our forecasts at this juncture, pending an upcoming meeting with management to get a clearer picture on the long-term impact of MFRS16 and the growth prospects going forward. Maintain BUY with a TP of RM1.30.

2018 Core Earnings Within Expectations

Full year 2018 core earnings was within expectations, accounting for 99% and 101% of our and consensus estimates respectively. The commendable performance was driven primarily by an uptick in patient traffic (outpatients: +2.7% yoy, inpatients: +4.6% yoy) coupled with higher average revenue per bed, especially for Malaysian operations (+4% yoy).

Improvements Seen in All Three Regions

In 4Q18, PBT improvements was shown in all three regions, with Malaysian operations recording +12% yoy growth in pretax-profit while Indonesian and Australian operations reported narrowed pre-tax losses (-10% and -44% yoy respectively). On a positive note, one of KPJ's two Indonesian hospitals, RS Bumi Serpong, has started rejecting non-profitable patient cases that are expected to result in negative margins.

MFRS16 Not a Major Concern

Under MFRS16, the new accounting standard on leases (effective 1st Jan 2019), KPJ is required to recognise the lease liability and right-of-use of asset on its balance sheet (i.e. 18 hospitals), which were previously off-balance sheet items. This is expected to lead to a net non-cash charge of ~RM17m in 2019E to account for interest expense on the lease liability and depreciation of the right-of-use asset (c.8% of our 2019E earnings). Besides, the increase in net gearing to ~2x (4Q18: 0.6x) as a result of the adoption will not impact the borrowing costs as the Group’s lenders will exclude the impact of MFRS16.

Maintain Buy and TP of RM1.30

We maintain our BUY rating on KPJ based on SOTP-derived TP of 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 - 20 Feb 2019