1H16 core net profit of RM426m (-8% YoY) came in within expectations, at 45% and 41% of our and consensus’ fullyear forecasts, respectively. No dividend was declared in this quarter as expected. Maintain Underperform. Our target price is RM5.59 based on SoP.

Key Result Highlights

QoQ, 2Q16 revenue came in flat due to lower inpatient admission in Malaysia (-4%) and lower revenue per inpatient in Singapore (-4%) mitigated by higher inpatient admission in Singapore (+3.3%) and higher revenue per inpatient in Malaysia (+6.3%). However, 2Q16 EBITDA was 10% lower due to higher cost pressure as a result from the immediate vesting of the first tranche of the 2016 LTIP grant and incremental share-based expense from the 2016 ESOS grant and further exacerbated by pre-opening expense incurred by Gleneagles Hong Kong as it ramped up its preparations for opening in 2017. Stripping out gains from disposal of 90% equity interest of Shenton Insurance Pte Ltd., 2Q16 PATAMI came in at RM187.7m (-21% QoQ).

YoY, 1H16 revenue grew 20% due to high intensities in patient volume and revenue of existing operations and to organic growth of existing operations and the commencement of operations of Gleneagles Kota Kinabalu Hospital, Acibadem Taksim and Gleneagles Medini Hospital. The acquisition of Continental, Global Hospitals and Tokuda Group and City Clinic further boosted revenue. This lifted EBITDA by 11%. However, core PATAMI fell 8% to RM426m due to a higher effective tax rate of 24% compared to 22% in 1H15.

Outlook. Overall, over the short-to-medium term on the back of escalating costs pressure as well as a slower-than-expected economic outlook, margins could be under pressure. As an indication, this quarter’s EBITDA margin fell from 25% in 1Q16 to 23% in 2Q16 arising from escalating costs. The start-up costs on pre-opening of hospitals, including Gleneagles Hong Kong (expected to commence in 1Q17) are expected to put pressure on cost and margins at least over the shortterm. Elsewhere, the opening of Mumbai Hospital is put on hold pending negotiation with its partner.

Growth driver in the next five years will come from the following:- (i) In Malaysia, PPL is currently undertaking expansion projects in three hospitals, namely Pantai Hospital Ayer Keroh (160 beds, completion in end 2017), Pantai Hospital Klang (80 beds), Pantai Kuala Lumpur (120 beds, completion in end 2017). Greenfield projects meanwhile, namely Gleneagles Medini (phase 1b, 160 medical suites, completion in end 2017), and (ii) in Turkey, Acibadem is currently undertaking expansion in Acibadem Maslak (200 beds, target completion 2017). The greenfield projects are Acibadem Altunizade (180 beds, target completion 2017), Acibadem Atasehir (325 beds, target completion 2017) and Acibadem Kartal (120 beds, target completion 2018). Over at the international side, its operations in Hong Kong are expected to commence in 2H17.

Maintain UNDERPERFORM. No changes to our FY16E and FY17E numbers. Our target price is RM5.59 based on SoP. The stock is currently trading at PERs of 56x for FY16E and 49x for FY17E, which appear rich as compared to its average net profit growth prospects of 11% p.a. over FY16 and FY17.

Source: Kenanga Research - 26 Aug 2016