1H16 core PATAMI of RM78.3m (+12% YoY) came in within expectations at 49% and 50% of our and consensus fullyear forecasts. Maintain MARKET PERFORM and target price of RM4.38 based on unchanged 27x FY17E EPS.

Within expectations. 1H16 core PATAMI of RM78.3m (+12% YoY) came in within expectations at 49% and 50% of our and consensus full-year forecasts after excluding an one-off provision for ESOS payments (RM13.8m). A second interim single-tier DPS of 1.5 sen was declared, bringing 1H16 DPS to 3.3 sen which is within our expectation.

Key Result Highlights

QoQ, 2Q16 top line rose 2.8% due to higher revenue from Malaysia (+2.4%) driven by lower inpatient and outpatients volume (-2%) but more than offset by higher revenue per inpatient. Revenue growth came from new hospitals, namely KPJ Kuantan, KPJ Klang, KPJ Rawang, KPJ Pasir Gudang and KPJ Maharani and organic growth from existing operating units. However, 2Q16 core PATAMI fell 6% to RM38m excluding an one-of provision for ESOS payment for both 1Q16 and 2Q16 of RM6.1m and RM7.7m, respectively eroded by a higher effective tax rate of 32% compared to 29% in 1Q16. Interestingly, Indonesia continued to report a second consecutive quarterly profit albeit a small profit of RM0.5m due to higher revenue (+8%).

YoY, 1H16 revenue rose 6% largely contributed by the increase in revenue from the new hospitals, namely KPJ Kuatan, KPJ Klang, KPJ Rawang, KPJ Pasir Gudang and KPJ Maharani and organic growth from existing operating units. This brings 1H16 core PATAMI to RM78.3m (+12% YoY) after excluding an one-off provision for ESOS payments (RM13.8m). Despite the operational positives, KPJ has a relatively higher net gearing of 81% (1H15 at 72%) from increased borrowings to support its expansion.

Outlook. Earnings growth is expected to be pedestrian over the next few quarters. In Indonesia, there are plans to acquire an operator with a 150-bed private hospital. Elsewhere, 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 and KPJ Pahang Specialist.

Maintain MARKET PERFORM and target price of RM4.38 based on unchanged 27x FY17E EPS.

Source: Kenanga Research - 30 Aug 2016