KPJ Healthcare (KPJ)’s revenue and core net profit grew 10% and 15% yoy respectively, mainly driven by an increase in the number of patient visits, radiology cases and surgeries, as well as the continual ramp-up of newly-opened hospitals. The results were within our expectations. We note that Jeta Gardens will be reclassified and consolidated under the group’s continuing operations effective 4Q19. We expect the strong patient volume growth for its Malaysia and Indonesia operations to be offset by the drag from Jeta Gardens. We maintain our earnings forecasts and HOLD rating on KPJ with an unchanged target price (TP) of RM0.97. KPJ declared an interim dividend of 0.5sen for the quarter.

3Q19 Results Within Expectations

KPJ’s revenue grew 10% yoy in 3Q19, driven by growth in both the Malaysia (+10% yoy) and Indonesia (+30% yoy) operations. Core net profit rose 15% yoy in 3Q19, mainly driven by higher revenue and the increase in share of profit from associates (+35%) especially from Vejthani Hospital in Thailand, which offset the higher depreciation and finance expenses due to the adoption of MFRS16. The non-cash charge arising from MFRS16 adoption was RM3m in 3Q19 (6% of 3Q19 core net profit). 9M19 core net profit was within expectations, making up 73-74% of the consensus and our estimates.

Strong Inpatient Volume in 3Q19

Revenue derived from the Malaysia operations grew 10% yoy in 3Q19, mainly driven by the increase in the number of patient visits, radiology cases and surgeries, especially for KPJ Johor, KPJ Selangor and KPJ Rawang, as well as the continual ramp-up of newly-opened hospitals, KPJ Perlis and KPJ BDO. KPJ Batu Pahat, which commenced operation on 18 September 2019 with 25 operating beds, also contributed to the improved revenue. Inpatient and outpatient volumes grew by 10.4% and 5.6% yoy. Meanwhile, the Indonesia operations’ revenue grew 30% yoy, boosted by the increase in the number of patients (+21% yoy) on the back of consecutive marketing activities and the introduction of treatment packages. This, coupled with lower operational costs incurred, led to a turnaround in its Indonesia operations in 3Q19 (3Q19: RM4.4m vs. 3Q18: -RM0.4m).

Maintain HOLD With An Unchanged 12-month TP of RM0.97

We maintain our earnings estimates and HOLD rating on KPJ with an unchanged SOTP-derived TP of RM0.97. We believe valuation of the stock is fair at current levels as we expect the strong patient volume growth for its Malaysia and Indonesia operations to be offset by the drag from Jeta Gardens. Upside risk: stronger-than-expected inpatient volume; downside risk: regulation of medicine prices and higher-than-expected start-up losses.

Source: Affin Hwang Research - 29 Nov 2019