Period  3Q14/9M14

Actual vs. Expectations 9M14 PATAMI of RM93.1m (+33% YoY) came in above our expectation, at 81% of our full-year net profit forecast. However, the results came within consensus at 74% of consensus full-year net profit. The positive variance from our forecast was due to lower-than-expected losses at support services division.

Dividends  A third interim single tier DPS of 2 sen was declared and will be going ex-div on 29 Dec 2014. This brings its 9M14 total dividend to 4.9 sen.

Key Result Highlights QoQ, 3Q14 PATAMI fell 14% to RM29m, no thanks to higher depreciation arising from commencement of new hospitals and lower contribution from 49%-owned KPJ Al-Aqar Healthcare REIT. We believe losses from Bandar Baru Klang and Muar KPJ contributed to lower bottom line as well. However, further losses were cushioned by narrower losses at support services division to RM2.8m from RM7.9m in 2Q14.

 YoY, 9M14 net profit rose 33% due to higher earnings contribution from Malaysia (+24%), underpinned by reduced losses from new hospitals namely KPJ Rawang and KPJ Bandar Baru Klang Specialist Hospital and lower losses from Indonesia.

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. 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 upgrade our FY14E net profit by 9% after factoring in lower-than-expected losses in the support services division. No change to our FY15 forecast.

Rating & Valuation

 Maintain UNDERPERFORM and TP of RM3.31 based on unchanged 27x FY15 EPS. The stock is currently trading at PERs of 31x for both FY14E and FY15E, which appear rich as compared to its average net profit growth of 12% 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