KPJ Healthcare (KPJ)’s revenue grew 8% yoy in 4Q19, driven by commendable patient volume growth, a higher number of procedures performed and the continual ramp-up of young and new hospitals. 2019 earnings came in above expectations as the 4Q19 core net profit rose 96% yoy mainly driven by the recognition of investment tax allowance which led to a reduction in tax expense. We raise our 2020-21 earnings forecasts by 6% to factor in higher inpatient volume growth. We maintain our HOLD rating on KPJ with a slightly higher TP of RM1.00.

Exceeded Expectations on Recognition of Investment Tax Allowance

KPJ’s revenue grew 8% yoy in 4Q19, driven by growth in both the Malaysian (+8% yoy) and Indonesian (+20% yoy) operations. Core net profit almost doubled yoy in 4Q19, mainly due to a tax credit arising from the recognition of investment tax allowance (ITA), for which the group had obtained approval from authorities during the quarter, which resulted in a reduction in the tax expense. This brings the 2019 core net profit to RM215m (+25% yoy) – above both our and consensus expectations. The ITA is for approved development and allowable capex on major medical equipment. Going forward, while KPJ still has a last batch of ITA which may boost its bottom-line, the timing of the recognition is not clear yet as it is still pending regulatory approval and is more of a one-off boost.

Commendable Inpatient Volume Growth

Revenue derived from the Malaysia operations grew 8% yoy in 4Q19, mainly driven by the uptick in patient traffic (outpatients: +3.5%, inpatient: +5% yoy), higher revenue intensity (+7% yoy) and increased number of procedures performed (especially surgeries), especially for KPJ Rawang, KPJ Pasir Gudang, KPJ Tawakkal KL, KPJ Perlis, KPJ BDO, KPJ Batu Pahat, and KPJ Seremban. This, coupled with the cost optimisation initiatives, led to the 11% yoy growth in the Malaysian operations’ PBT in 4Q19. Revenue at the Indonesian operations grew 20% yoy, boosted by the growth in patient volume (+19% yoy) on the back of expansion in bed capacity.

Maintain HOLD With a Marginally Higher 12-month TP of RM1.00

We raise our 2020-21 earnings estimates by 6% to factor in higher patient volume in view of the group’s earlier-than-expected opening of new hospitals, and introduce our 2022 forecasts. We maintain a HOLD rating on KPJ with a marginally higher SOTP-derived TP of RM1.00 as we think its valuation is fair at current levels. Upside/downside risks: stronger/ weaker-than-expected inpatient volume growth, retraction/implementation of price controls for medicines, and lower/higher-than-expected start-up losses for new hospitals.

Source: Affin Hwang Research - 27 Feb 2020