Period

2Q15/1H15

Actual vs. Expectations

1H15 PATAMI of RM69.9m (+9.3% YoY) came in above our expectations at 56% or our forecast. However, the results came in within market consensus’ expectation at 48%. The positive variance from our forecast was due to higher-thanexpected performance in its Malaysian operations.

Dividends

A second interim single-tier DPS of 1.75 sen was declared which brings 1H15 DPS to 3.5 sen. Key Result

Highlights

QoQ, 2Q15 reported PATAMI rose 6% to RM36m largely anchored by the Malaysian segment which offset the losses from aged care and support services and a 2.4% increase in inpatient admission.

YoY, 1H15 net profit rose 9.3% due to higher earnings contribution from Malaysia (+6%), underpinned by reduced losses from new hospitals namely KPJ Rawang and KPJ Bandar Baru Klang Specialist Hospital and lower losses from aged care services. We understand that losses narrowed in 1H15 to RM14-15m compared to RM20-21m in 1H14. 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 buffered 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.

Change to Forecasts

We are raising our FY15E and FY16E earnings by 5.5% and 5.7%, respectively due to the better-thanexpected results.

Rating & Valuation

Maintain UNDERPERFORM. However, TP raised from RM3.54 to RM3.74 based on unchanged 27x FY16 EPS. The stock is currently trading at PERs of 32x and 30x 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 - 28 Aug 2015