Despite recording higher revenue (+5% yoy) in 1Q19 due to higher revenue intensity, core net profit was flat at RM42.8m due to higher tax expenses and the adoption of MFRS16. The results came in within expectations. KPJ declared an interim DPS of 0.5sen for the quarter, same as 1Q18’s. Maintain HOLD with an unchanged TP of RM1.00.

1Q19 Results Within Expectations

KPJ’s 1Q19 revenue grew 5% yoy in 1Q19, mainly driven by growth in both Malaysia (+5% yoy) and Indonesia (+38% yoy) operations. Core net profit was however flat at RM42.8m (+0.2% yoy) as the effective tax rate was higher at 32% in 1Q19 (1Q18: 26%), due to i) certain expenses not deductible for tax purposes, ii) non-recognition of deferred tax assets arising from unutilised capital allowances, and iii) tax losses of newly-opened companies due to uncertainties of recoverability to be offset with future profits. The core net profit was also adversely impacted by a net non-cash charge of RM3m, as a result of the adoption of MFRS16. KPJ’s 1Q19 core net profit came in within expectations, accounting for 23% and 22% of our and consensus’ full-year estimates respectively.

Lower Inpatient Volume Seen for Malaysia Operations

Malaysia operations’ revenue grew 5%, mainly driven by higher average revenue per inpatient admission. This coupled with the cost optimisation initiatives, boosted the 12% yoy growth in core PBT. Inpatient volume declined by 1.0% yoy and 3.8% qoq as expected, which is in line with the weakness in Consumer Sentiment Index (CSI) as mentioned in our previous report. Meanwhile, Indonesia operations’ revenue grew 38% yoy, mainly driven by an increase in the number of patients on the back of aggressive marketing activities and treatment packages introduced. This coupled with lower operational cost incurred (due to better utilisation of resources) had resulted in a turnaround at its Indonesia operation’s PBT level, recording RM1.4m PBT in 1Q19 (1Q18: –RM0.7m). That said, the contributions to the group is still minimal at c.2% of total PBT.

Maintain HOLD With An Unchanged TP of RM1.00

All in, we remain cautious on the lower inpatient volume due to weaker consumer sentiment and potential start-up losses from greenfield expansion. However, the stock is trading at close to its 1-year low, leading us to believe that risk-reward is fair. We maintain earnings estimates and HOLD rating on KPJ with an unchanged SOTP-derived TP of RM1.00. Upside risk: higher inpatient volume; downside risk: delay in new hospital openings and higherthan-expected start-up losses.

Source: Affin Hwang Research - 3 Jun 2019