KPJ Healthcare (KPJ) reported a weak set of results: 1Q20 core net profit slipped by 10% yoy to RM38.5m due to higher operating expenses for new hospitals that are still under the gestation period. The results were broadly within our expectations but below the street’s forecasts. Notwithstanding the weak 2020 earnings outlook, we expect ample market liquidity, lower funding cost and investors shifting focus to a 2021E earnings recovery to support KPJ’s valuation. As such, we raise our price target to RM0.90 (from RM0.80) after rolling forward our valuation horizon and on a lowered WACC assumption. Upgrade to HOLD. At 26x 2021E PER, KPJ is now trading at its 9-year average PER, which looks fair to us.

1Q20 Core Earnings Fell by 10% Yoy / -54% Qoq

KPJ’s 1Q20 core net profit fell by 10% yoy to RM38.5m due to higher operating costs and depreciation charges arising from the new hospitals opened in 2019 (ie, KPJ Bandar Dato’ Onn, KPJ Miri, KPJ Batu Pahat). Sequentially, KPJ’s core net profit fell by a sharp 54% qoq due to lower revenue (-6.3% qoq) and the higher taxation (KPJ recognised an investment tax allowance in 4Q19). KPJ’s 1Q20 core net profit accounts for 28% of Affin Hwang and 21% of consensus full-year earnings forecasts. In view of a likely earnings contraction in 2Q20, we deem the results as in line with Affin Hwang but below market forecasts.

Earnings Should Weaken Further in 2Q20

KPJ’s earnings should weaken further in 2Q20E due to lower inpatient arrivals and a decline in procedures performed, given: (i) a scale down in business operations whereby KPJ defers the elective procedures and appointments to reduce traffic into its hospitals; (ii) cautious sentiment; and (iii) the MCO that affected medical tourism and discourages the patients to travel inter-state for medical treatments. Nonetheless, we expect the activities to recover progressively post-MCO.

Ample Liquidity Should Support Share Price, Upgrade to HOLD

Notwithstanding the weak 2020E earnings outlook, we expect ample market liquidity, lower funding cost and investors shifting focus to a 2021E earnings recovery to support KPJ’s valuation. At such, we raise our SOTP-derived price target to RM0.90 (from RM0.80) after rolling forward our valuation horizon and on a lowered WACC assumption. Upgrade to HOLD from Sell.

Source: Affin Hwang Research - 11 Jun 2020