Period  1Q14

Actual vs. Expectations   1Q14 PATAMI of RM30m (+20% YoY) came in within expectations, at 26% of our and consensus full-year net profit forecasts.

Dividends   A first interim single tier DPS of 1.45 sen was declared, which will go ex-div on 26 June 2014.

Key Result Highlights QoQ,   1Q14 PATAMI fell 8% no thanks to losses at support services segment, which was higher QoQ. More importantly this could well mean that this division is not out of the woods yet. However, excluding a revaluation gain from investment properties of an associate, Al-Aqar Healthcare REIT, amounting to RM10.5m in 4Q13, 1Q14 PATAMI rose 36% QoQ.

 YoY, 1Q14   net profit rose 20% due: to (i) higher revenue contribution across the board, including Malaysia (+9%); Indonesia (+56%) and support services (+10%); and (ii) reduced losses from the opening of new hospitals namely KPJ Bandar Baru Klang Specialist Hospital and Pasir Gudang.

Outlook    Earnings growth is expected to be pedestrian over the next few quarters. In Indonesia where we expect losses in Bumi Serpong Damai to persist over the next several quarters due to difficulty in attracting doctors to its establishment leading to lower bed utilisation of 40%. However, this is expected to be negated by the profitable Medika Permata Hijau. For FY14, the KPJ Rawang Specialist hospital (160 beds), which has been completed, is now awaiting the inspection and approval by the Ministry of Health. Once finalised, it is expected to commence operations in June 2014 while the Muar Medical Centre (120 beds) is expected to start by end-June 2014. Looking into FY15, KPJ is targeting to open KPJ Perlis and KPJ Pahang Specialist. Additionally, KPJ is incurring higher staff costs due to: (i) the gradual opening of more beds since it needs to maintain a required ratio of staff per hospital, and (ii) KPJ employing more staff in its headquarters to support its on-going projects. We expect startup losses from Sabah, Muar and Rawang to drag down earnings once they start operating as, typically, the gestation period averaged two to three years.

Change to Forecasts    No changes to our forecasts.

Rating & Valuation    We roll forward our valuation from FY14E to FY15E. As such, our TP is raised from RM2.67 to

RM2.89 based on 23.5x FY15 EPS. Maintain UNDERPERFORM. The stock is currently trading at PERs of 29x for FY14E and 27x for FY15E, which appear rich as compared to its average net profit growth of 11% p.a. over FY14E and FY15E.

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

Source: Kenanga