Period  4Q14/FY14

Actual vs. Expectations  12M14 PATAMI of RM139.7m (+36% YoY) came in above our and market consensus expectations. However, stripping out gain on fair value adjustments in relation to newly acquired office tower at Menara 238 (RM10.8m) and in relation to investment properties of an associate, Al-‘Aqar Healthcare REIT (RM5.6m), CORE PATAMI came in within both our and consensus full-year forecasts at RM123.3m (+32% YoY).

Dividends  A fourth interim single tier DPS of 2.6 sen was declared and will be going ex-div on 25 Mar 2015. This brings FY14 total dividend to 7.5 sen which is above our expectation.

Key Result Highlights

 QoQ, 4Q14 reported PATAMI rose 59% to RM46.6m. However, stripping out gain on fair value adjustments in relation to newly acquired office tower at Menara 238 (RM10.8m) and in relation to investment properties of an associate, Al-‘Aqar Healthcare REIT (RM5.6m), CORE PATAMI came in at RM30.2m (+4% QoQ).

 YoY, FY14 net profit rose 32% due to higher earnings contribution from Malaysia (+35%), underpinned by reduced losses from new hospitals namely KPJ Rawang and KPJ Bandar Baru Klang Specialist Hospital and lower losses from Indonesia and aged care services.

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 earnings once they start operating due to the typical gestation period averaging between two to three years.

Change to Forecasts  No change to our FY15E and FY16E earnings.

Rating & Valuation  We roll over our valuation from FY15E to FY16E. By the same token, our TP is raised from RM3.31 to RM3.54 based on unchanged 27x FY16 EPS.

 Maintain UNDERPERFORM. The stock is currently trading at PERs of 33x and 31x on FY15E and FY16E, which appear rich as compared to its pedestrian net profit growth.

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