1Q16 PATAMI of RM34.2m (-0.8% YoY; +39% QoQ) came in below expectations at 21% of our and consensus full-year forecasts. Due to the weaker-than-expected results, we downgrade our FY16E and FY17E net profits by 7.1% and 7.5%, respectively, to take into account the lower-thanexpected average revenue per patient. Correspondingly, we downgrade our target price from RM4.43 to RM4.38 based on unchanged 27x FY17E revised EPS (valuation roll-forward from FY16E to FY17E).

Below expectations. 1Q16 PATAMI of RM34.2m (-0.8% YoY; +39% QoQ) came in below expectations at 20%/22% of our and consensus full-year forecasts. The negative deviation on our end was due to lower-than-expected average revenue per inpatient. A first interim single-tier DPS of 1.8 sen was declared, which is within our expectation.

Result Highlights:- QoQ, 1Q16 topline rose 7% due to higher revenue from Malaysia (+7%) driven by an increase of 1.7% and 3.2% for both average revenue per inpatient and outpatient, respectively. Revenue growth came from new hospitals namely KPJ Klang, KPJ Rawang, KPJ Pasir Gudang and KPJ Maharani and organic growth from existing operating units. However, 1Q16 reported PATAMI rose 39% to RM34.2m due to a lower effective tax rate of 29% compared to 39% in 4Q15. Interestingly, Indonesia reported a profit of RM0.5m due to higher revenue generated from Rumah Sakit Bumi Serpong Damai, which has reported three quarters of profits over the last twelve quarters.

YoY, 1Q16 revenue rose 5% largely contributed by an increase in revenue from the new hospitals namely KPJ Klang, KPJ Rawang, KPJ Pasir Gudang and KPJ Maharani and organic growth from existing operating units.

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%. KPJ Pahang has just commenced operations this month. Going forward, KPJ is targeting to open KPJ Perlis in 1Q2017 and hospitals in Bandar Datuk Onn Johor and in Kuching are slated for completion at the end of 2017.

Downgrade FY16E and FY17E net profits. We are downgrading our FY16E and FY17E earnings estimates by 7.1% and 7.5%, respectively, to take into account the lower-than-expected average revenue per patient.

Maintain Market Perform. Correspondingly, we downgrade our target price from RM4.43 to RM4.38 based on unchanged 27x FY17E revised EPS (valuation roll-forward from FY16E to FY17E). 

Source: Kenanga Research - 20 May 2016