Despite recording higher revenue (+6% yoy) on the back of stronger patient volume growth and revenue intensity in 2Q19, KPJ’s core net profit declined by 1% yoy due to the adoption of MFRS16 and higher tax expenses. The results were within our expectations. We maintain our earnings forecasts and HOLD rating on KPJ, but with a lower target price (TP) of RM0.97 (from RM1.00) as we raise the share count to assume a full conversion of its ESOS which will expire in early-2020.

2Q19 Results in Line With Expectations

KPJ’s revenue grew 6% yoy in 2Q19, driven by growth in both Malaysia (+6% yoy) and Indonesia (+39% yoy) operations. However, core net profit dropped 1% yoy due to higher depreciation and finance expenses as a result of the adoption of MFRS16. The non-cash charge arising from the adoption was RM2.6m in 2Q19 (c.6% of 2Q19 core net profit). Besides, the effective tax rate was also higher at 31% in 2Q19 (2Q18: 27%) due to i) certain expenses not deductible for tax purposes, and ii) non-recognition of deferred tax assets arising from unutilised capital allowances and tax losses of newly-opened hospitals. Core net profit was within expectations, making up 47-48% of consensus and our full-year earnings estimates.

Strong Inpatient Volume in 2Q19

Revenue derived from Malaysia operations grew 6% yoy in 2Q19, mainly driven by the increase in the number of patient visits and surgeries, especially for KPJ Rawang, KPJ Pasir Gudang and KPJ Johor, and the newly-opened hospitals, KPJ Perlis and KPJ Bandar Dato’ Onn. Inpatient and outpatient volume grew by 7.6% and 5.6% yoy, but declined by 0.3% and 1.2% qoq respectively. Meanwhile, Indonesia operations’ revenue grew 39% yoy, boosted by an increase in the number of patients on the back of consecutive marketing activities and treatment packages introduced. This coupled with lower operational costs incurred resulted in pre-tax loss narrowing (2Q19: - RM0.1m vs. 2Q18: -RM1.8m).

Maintain HOLD With a Lower TP of RM0.97

We maintain our earnings estimates as we highlight non-diluted EPS and core EPS in the table below. We estimate fully-diluted EPS of 4.1/4.2/4.4 sen in 2019/20/21E, respectively, assuming a full conversion of its ESOS, which will expire in February 2020 (exercise price: RM0.91). We believe current valuation of the stock is fair and maintain our HOLD rating on KPJ with a lower TP of RM0.97. Upside risk: stronger-than-expected inpatient volume; downside risk: regulation of medicine prices and higher-than-expected start-up losses.

Source: Affin Hwang Research - 3 Sept 2019