Period a 2Q14/1H14

Actual vs. Expectations 1H14 PATAMI of RM64m (+27% YoY) came in within expectations, at 55% of both consensus and our full-year net profit forecasts. We consider the 1H14 results to be within expectations in anticipation of higher operating cost and start-up losses from new hospitals opening.

Dividends  A second interim single tier DPS of 1.45 sen was declared and will be going ex-div on 26 Sept 2014. This brings its 1H14 total dividend to 2.9 sen which is inline with our expectation.

Key Result Highlights QoQ, 2Q14 PATAMI rose 12% to RM33.7m thanks to: (i) higher average in-patient volume (c.5-7%) and average revenue per in-patient (c.4-5%) in Malaysia as well as commencement of two new hospitals namely KPJ Rawang (full quarter contribution) and KPJ Muar (in Jun 14), (ii) higher contribution from 49%-owned KPJ Al-Aqar Healthcare REIT’s, and (iii) more than offset higher losses at the aged care facility (RM8m compared to RM5m in 1Q14).

 YoY, 1H14 net profit rose 27% due to higher earnings contribution from Malaysia (+16%) underpinned by reduced losses from the opening of new hospitals namely KPJ Rawang, KPJ Bandar Baru Klang Specialist Hospital and Pasir Gudang.

Outlook  Earnings growth is expected to be pedestrian over the next few quarters. In Indonesia, 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 2H14, the KPJ Sabah Muar Medical Centre (120 beds) is expected to start by 3Q 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 certain required ratio of staff per hospital, and (ii) KPJ employing more staff in its headquarters to support its on-going projects. We expect start-up losses from Sabah, Muar and Rawang to drag down earnings once they start operating due to the typical gestation period averaging between two to three years.

Change to Forecasts

 We conservatively maintain our FY14 EPS growth forecast of 23%, slightly below KPJ’s 27% YTD net profit growth, in expectation of higher operating cost and losses from opening of Rawang and Muar hospitals.

Rating & Valuation Maintain UNDERPERFORM. However, we raised our TP by 14% from RM2.89 to RM3.31 based on

27x FY15 EPS (from 24.5x previously), inline with higher PER valuations of regional healthcare players. The stock is currently trading at PERs of 33x for FY14E and 30x for FY15E, which appear rich as compared to its average net profit growth of 15% 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