12M16 core net profit of RM866m (-4% YoY) came within our expectation but below consensus by 9% from full- year forecasts. A single-tier DPS of 3.0 sen was declared, which came in within our expectation. Reiterate UNDERPERFORM and Target Price of RM5.42 based on SoP.

Key Result Highlights

QoQ, 4Q16 revenue grew 8% due to low base effect from the seasonally slower 3Q16. Revenue was largely driven by higher revenue per inpatient in both Malaysia (+2.5%) and Singapore (+5.8%) and boosted by intensities in inpatient admission in Turkey following the seasonally slow 3Q16. 4Q16 EBITDA was 4% lower, eroded by higher doubtful debts expenses (RM49m) and pre-opening expense incurred by Gleneagles Hong Kong as it ramped up preparations for opening in 2017. Stripping out exceptional items (please refer to table), 4Q16 core PATAMI came in at RM222.4m (+2% QoQ). A final single-tier DPS of 3.0 sen was declared, which is within our expectation.

YoY, 12M16 revenue grew 19% 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, Continental, Global Hospitals and Tokuda Group and City Clinic. However, EBITDA only grew 6.6% eroded by higher doubtful debts expenses (RM49m) and pre-opening expense incurred by Gleneagles Hong Kong. YoY, 12M16 reported PATMI decreased 34% to RM612.4m due to three exceptional items that were booked in 4Q16 namely; (a) charges of RM132.7m on its investment in Gleneagles Khubchandani Hospital in India, (b) settlement of RM53.6m for value-added tax claims in Turkey, and (c) unrealised foreign exchange loss of RM335.2m on translation of non-Turkish Lira borrowings. Stripping out exceptional items, core PATAMI fell 4% to RM866m due to higher depreciation from new hospitals and net financing costs.

Outlook. Overall, over the short-to-medium term, a slower-than- expected economic outlook and 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. 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. Our TP is RM5.42 based on SoP.

Source: Kenanga Research - 24 Feb 2017