• 3Q20 core net profit rebounded by 168% qoq to RM34m, driven by a 36% recovery in revenue, but it was still 33% weaker yoy.
• 9M20 core net profit of RM85m (-35% yoy) was below consensus and our expectations due to a high effective tax rate. Meanwhile, its profit margin held up admirably due to proactive cost optimisation efforts.
• We revised our 2020/21/22E EPS forecasts by -3%/+2%/+2% and raise KPJ’s price target to RM0.97. Maintain HOLD. At a 26x 2021E PER, KPJ is trading close to its 10-year average PER of 24x and looks fair to us.

3Q20 core net profit rebounded by 168% qoq to RM34m (-33% yoy)

KPJ’s 3Q20 revenue rebounded by 36% qoq to RM850.7m, driven by a strong recovery in the number of patient arrivals. The number of inpatients increased by 49% qoq to 63.1k patients while outpatients came in 27% higher qoq at 628.8k. Tracking the higher revenue, KPJ’s 3Q20 core net profit jumped by 168% qoq to RM34m. Notwithstanding the strong sequential recovery, the 3Q20 core net profit was 33% weaker yoy due to a 7% decline in revenue and higher effective tax rate. KPJ’s 3Q20 bed occupancy rate of 51% was 17 ppts below 68% in 3Q19.

9M20 core net profit was below market and our expectations

Cumulatively, KPJ’s 9M20 core net profit fell by 34.5% yoy to RM85.2m due to an 11% decline in revenue, as its business operations were affected by the Covid-19 pandemic and movement control orders, especially during 2Q20. Broadly, the results were below market and our expectations. KPJ’s 9M20 core net profit account for 60% of the consensus and 64% of our prior full-year earnings forecasts. The earnings miss was due mainly to a higher-than-expected tax rate on the non-recognition of tax benefits from tax losses for companies (new hospitals) under the gestation period. Its pretax profit was broadly within our expectations as a minor revenue miss was offset by an improved EBITDA margin from proactive cost optimisation.

Revising 2020-22E EPS forecasts by -3% / +2% / +2%

We observe that KPJ has traditionally recognised higher tax benefits during 4Q. That said, the 9M20 effective tax rate of 33% looks high and we have revised our effective tax rate assumption to 29%. We trimmed our 2020E revenue forecast in view of the low bed occupancy in 3Q20 but raised our EBITDA margin forecasts to 16.3%- 16.7%, tracking KPJ’s solid cost control in recent quarters. All in all, we cut our 2020E EPS forecast by 3% but raised those for 2021-22E by 2%.

Maintain HOLD with a higher price target of RM0.97

In tandem with our earnings forecast revisions, we raised our SOTP-derived 12- month price target to RM0.97 (from RM0.92). Maintain HOLD. At a 26x 2021E PER, KPJ is trading close to its 10-year average PER of 24x and looks fair to us. The key upside risks to our neutral view are a strong recovery in patient arrivals, higher revenue per patient, better-than-expected quarterly earnings due to strong cost reductions, and value-accretive corporate action / M&As. Downside risks are a weak recovery in quarterly earnings and higher-than-expected start-up costs for new hospitals.

Source: Affin Hwang Research - 1 Dec 2020