In light of the weak consumer sentiment index, we are turning more cautious on KPJ’s inpatient volume growth as KPJ mainly serves the mass market. We cut our 2019-21E EPS by 7-13%, largely to account for the impact of the adoption of MFRS16, lower patient volume growth, and start-up losses due to expansion of its new hospitals. We downgrade our call on KPJ to HOLD with a lower TP of RM1.00.

Sign of Potential Weaker Inpatient Growth

While KPJ finally charted a strong recovery in patient volume growth in 2018, we think that the recovery could be short-lived, as we have seen weakness in the Consumer Sentiment Index (CSI), and there is a high correlation between KPJ’s inpatient volume growth and the index movements. Moreover, despite recording stronger operational statistics and higher revenue, 2018 core earnings declined 2% yoy on higher tax and depreciation, as its expansion resumed. Hence we are also cautious on potential start-up losses from the greenfield expansion which may dilute its near-term earnings. This note marks a transfer of analyst coverage.

Operational Updates on Regional Front

KPJ’s Indonesia operations, which fell into the red since 4Q17 as a result of the new national healthcare policies, reported narrowed pre-tax losses and positive EBITDA in 2018. With the on-going realignment of the business mix to enhance service offerings targeting more private patients, KPJ aims to achieve PBT turnaround for its Indonesia operations by end- 2019. In addition, the disposal of its 57%-owned aged-care business in Australia, which was postponed due to the royal commission of inquiry and the soft property market, is now targeted to be completed by 2H19.

Downgrading to HOLD With a Lower TP of RM1.00

We cut our 2019-21E earnings for KPJ by 7-13%, mainly to account for i) the adoption of the new accounting standard, MFRS16, ii) lower patient volume growth due to weaker consumer sentiment, and iii) start-up costs from new hospital expansion. We roll forward our valuation basis to 2020E and downgrade our call on KPJ to HOLD (from BUY) with a lower SOTPbased 12-month TP of RM1.00 (from RM1.30). While the stock is currently trading at 2SD below its 5-year P/E and EV/EBITDA means, we believe valuation is fair at current levels in light of the risk of a potential de-rating of the stock on weakening consumer sentiment. Upside risk: higher patient volumes; downside risk: delay in new hospital openings. For sector exposure, we prefer IHH Healthcare (IHH MK, RM5.46, BUY).

Source: Affin Hwang Research - 21 May 2019