Period

1Q15

Actual vs. Expectations

1Q15 PATAMI of RM33.9m (+12% YoY) came in within expectations at 27% and 24% of our and market consensus, respectively.

Dividends

A first interim single-tier DPS of 1.75 sen was declared and will be going ex-div on 26 June 2015. Key Result

Highlights

QoQ, 1Q15 reported PATAMI fell 27% to RM33.9m. Excluding gains on fair value adjustments in relation to a newly acquired office tower at Menara 238 (RM10.8m) and in relation to investment properties of an associate, Al-‘Aqar Healthcare REIT (RM5.6m) in 4Q14, 1Q15 PATAMI rose 12%. 1Q15 earnings are largely anchored by the Malaysian segment which offset the losses from aged care and support services.

YoY, 1Q15 net profit rose 12% due to higher earnings contribution from Malaysia (+7%), underpinned by reduced losses from new hospitals namely KPJ Rawang and KPJ Bandar Baru Klang Specialist Hospital and lower losses from aged care services. Its Indonesian operations recorded a breakeven.

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 further 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 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

Maintain UNDERPERFORM and TP of RM3.54 based on unchanged 27x FY16 EPS. The stock is currently trading at PERs of 34x and 32x 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 Research - 29 May 2015