• 2Q20 core net profit fell by 67% qoq / 70% yoy to RM12.7m due to lower revenue (-29% qoq / -27% yoy), attributable to scaled-down operations and lower patient arrivals during the MCO / CMCO period.
• Cumulatively, 6M20 core net profit fell by 35% to RM51.2m due to the weak 2Q20 performance. The results were within market and our expectations.
• Looking ahead, we expect KPJ to report higher earnings in 2H20 due to pent-up demand for elective medical treatments. Maintain HOLD with an unchanged PT of RM0.90.

Weak 2Q20 earnings due to lower patient arrivals, scale-down in business

KPJ’s 2Q20 revenue fell by 29% qoq (-27% yoy) to RM626.6m due to lower patient arrivals, a scale-down in its business operations and postponement of elective procedures during the MCO / CMCO period. In 2Q20, the group reported a lower daily bed occupancy rate of 34%, a significant decline from 64% in 2Q19. While its EBITDA margin was stable in 2Q20, sticky depreciation & amortisation charges, lower associates earnings and a higher effective tax rate had resulted in a steep fall in its core net profit (-67% qoq to RM12.7m).

6M20 Core Net Profit of RM51.2m (-35% Yoy) Was Within Expectations

Cumulatively, KPJ’s 6M20 core net profit fell by 35.4% yoy to RM51.2m due to the weak 2Q20 earnings. To recap, KPJ’s 1Q20 core net profit was relatively robust at RM38.5m. Overall, the results were broadly within the market and our expectations. KPJ’s 6M20 core net profit accounts for 36-37% of the consensus and our full-year earnings forecasts. Moving into 2H20, we expect patient arrivals to recover strongly due to pent-up demand for delayed elective medical treatments.

Maintain HOLD With An Unchanged Price Target of RM0.90

We maintain our HOLD rating and SOTP-derived 12-month price target of RM0.90. At 24x 2021E PER, KPJ is trading at a slight discount to its 9-year average PER of 26x and looks fair to us, considering its unexciting earnings outlook. Looking into 2021-22E, we expect the higher upfront costs for its new hospitals (depreciation, personnel costs, interest expenses) to suppress its earnings growth. The key upside risk is higher-than-expected patient arrivals while downside risks are a weak recovery in quarterly earnings, and higher-than-expected upfront costs for new hospitals.

Source: Affin Hwang Research - 28 Aug 2020