Period  4Q13/FY13

Actual vs. Expectations  The reported FY13 net profit of RM102.5m (-27% YoY) came in below our expectation, at only 89% of our fullyear net profit forecast but was within consensus. However, stripping out revaluation gain from investment properties of an associate, Al-Aqar Healthcare REIT, amounting to RM9.2m, core FY13 net profit of RM93.3 (-33% YoY) came in below expectations, by 18% and 12% of our and consenses forecasts, respectively. The negative variance from our result is largely due to higherthan-expected losses incurred in its newly opened hospitals and losses at the support services segment.

Dividends  No dividend was declared.

Key Result Highlights QoQ, the 4Q13 turnover rose 12% to RM634m largely due to higher contribution from Malaysia (+10%) and support services (+50%) which more than offset aged care facility (-27%) and Indonesian operations (-54%). We believe the higher revenue reported is due to higher inpatient admissions from existing hospitals as well as the newly opened KPJ Bandar Baru Klang Specialist Hospital and Pasir Gudang. Correspondingly, 4Q13 PATAMI came in 68% higher at RM33m thanks to support services segment, which returned to profitability. However, excluding a revaluation gain from investment properties of an associate, Al-Aqar Healthcare REIT, amounting to RM9.2m, core 4Q13 net profit came in at 23.5m (21% QoQ).

 YoY, FY13 core net profit fell 33% due: to (i) losses from the opening of new hospitals namely KPJ Bandar Baru Klang Specialist Hospital and Pasir Gudang, and (ii) support services segment’s losses of RM20.5m compared due to higher staff costs as a result of new hospital openings as well as brownfield expansion and start-up cost incurred in new campus expansion.

Outlook  Despite the encouraging news that KPJ has won its appeal against the judgment of the Hospital Penawar civil law suit, the Plaintiffs have filed an Application for leave to appeal to the Federal Court against the Court of Appeal’s decision. This remains a threat to KPJ’s earnings prospect.

 The expansion of existing hospitals will have a positive impact to KPJ, but this will be offset by its new greenfield hospitals, which will have an average gestation period between three to five years. The openings of hospitals in Sabah, Muar and Rawang scheduled for FY14 could further negate earnings upside.

Change to Forecasts We slashed our FY14 net profit by 16% due to the poor set of results and after taking into account the higherthan-expected losses and operating costs from its newly start-up hospitals. We also introduce our FY15E numbers.

Rating Correspondingly, our TP has been cut by 16% from RM3.33 to RM2.80 based on unchanged 23.5x FY14 EPS (+0.5 standard deviation above the 6-year forward average PER). Since our downgrade in Feb 2013, the stock has fallen by 19%. Maintain UNDERPERFORM.

Risks to Our Call The key upside risk to our earnings forecasts is the fasterthan-expected turnaround of its newly opened hospitals.

Source: Kenanga