9M16 core net profit of RM643.5m (-6% YoY) came in below expectations, at 68% and 65% of our and consensus’ full-year forecasts, respectively. The negative variance from ours was due to higher-than-expected operating costs. We downgrade FY16E and FY17E net profits by 3-4% to take into account the higher-thanexpected operating cost. Our target price is reduced from RM5.59 to RM5.42 based on SoP. Maintain UNDERPERFORM.

Key Result Highlights

QoQ, 3Q16 revenue was 1.3% lower due largely to the seasonally weaker-than-expected summer months in Turkey. Inpatient admission in Turkey was 9.7% lower which was mitigated by inpatient admission in Malaysia (+5.6%) and Singapore (+2.4%). By the same token, 3Q16 EBITDA was 1.5% lower, eroded by preopening expense incurred by Gleneagles Hong Kong as it ramped up preparations for opening in 2017. Stripping out exchange loss on borrowings, 3Q16 PATAMI came in at RM217.6m (+15.9% QoQ). No dividend was declared in this quarter as expected.

YoY, 9M16 revenue grew 20% due to: (i) high intensities in patient volume and revenue of existing operations, and (ii) 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, which lifted EBITDA by 12.5%. However, core PATAMI fell 6% to RM643.5m due to a higher effective tax rate of 24% compared to 21% in 9M15.

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 come under pressure. As an indication, EBITDA margin fell from 25% in 9M15 to 23% in 9M16, 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 short-term. Elsewhere, the opening of Mumbai Hospital is put on hold pending negotiation with its partner. Growth drivers 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).

Maintain UNDERPERFORM. We downgrade FY16E and FY17E net profits by 3-4% to take into account of higher-than-expected operating cost in Malaysia and Singaproe. Our target price is reduced from RM5.59 to RM5.42 based on SoP.

Source: Kenanga Research - 25 Nov 2016