Period     1QFY13

Actual vs. Expectations    The reported 1QFY13 net profit of RM25.1m came in below expectations at only 16% of ours and the consensus  fullyear earnings estimates. The variance from our result is largely due to higher-than-expected losses incurred in its newly opened hospitals. 

Dividends    A first FY13 interim single tier dividend of 2.0 sen has been declared.

Key Result Highlights   QoQ, the 1QFY13 net profit fell 33% to RM25m. However, stripping out the gain on the disposal of shares in Al-‘Aqar Healthcare REIT and the gain on revaluation of Investment Properties totalling RM10m in 4QFY12, the 1QFY13 net profit only fell 7.4% due largely to losses at the  newly opened hospitals. We understand that the losses totalling RM9m came from Jeta Gardens, KPJ University College, KPJ Bandar Baru Klang and Bumi Serpong Damai, Jakarta.

YoY, the 1QFY13 net profit fell 25% due to (i) losses from the opening of new hospitals namely KPJ Bandar Baru Klang Specialist Hospital and (ii) widening losses from Indonesia (RM2.2m compared to RM1.7m in 1QFY12) and Jeta Gardes (RM2.4m compared to RM1.6m in 1QFY12). However, the earnings were supported by 49%-owned KPJ Al-Aqar Healthcare REIT’s contribution, which accounted for 34% of KPJ’s net profit. 

Outlook    The expansion of existing hospitals will have a positive impact to KPJ. However, this will be offset by its  new greenfield hospitals, which will have an average gestation period between three to five years.

Earnings contribution over the next two years is expected to come from the building of new hospitals as well as  the expansion of its existing capacity and services. The planned capex in FY13 and FY14 are estimated at between RM200m and RM250m p.a. For FY13, the KPJ Pasir Gudang Specialist hospital (120 beds), which has been fully constructed, is now awaiting the inspection and approval by the Ministry of Health. Once finalised soon, it is expected to commence operations in 2Q2013 while both Sabah Medical Centre (250 beds) and KPJ Muar Specialist are expected to start by end-4Q2013. Looking into FY14, a new hospital in Bandar Datuk Onn, Johor Bahru (390 beds) and a new specialist centre, KPJ Pahang Specialist, are expected to commence operations. 

Change to Forecasts     We are downgrading our FY13 and FY14 net profits by 6.8% and 5.7% respectively due to the poor set of results and after taking into account the higher-than-expected losses from its newly start-up hospitals

Rating  Correspondingly, out TP has been cut by 5.6% from RM6.37 to RM6.02 based on unchanged 23.5x FY14 Fully diluted (FD) EPS (+0.5 standard deviation above the 6-year forward average PER). We are henceforth downgrading the stock rating from a MARKET PERFORM to an UNDERPERFORM.

Valuation     The stock is now trading above the historical average PER band by >+1 SD above the mean. We believe the company’s growth trajectory has already been reflected in its financials, which we believe is rich considering that its profit growth will be at the average low teens over the next two years.  

Risks    The key upside risk to our earnings forecasts is the faster than expected turnaround of its newly opened hospitals.

Source: Kenanga