1H17 core PATAMI of RM83.5m (+7% YoY) came in within expectations at 51%/53% of our/consensus full-year forecasts. Overall contribution from Malaysian operations more than offset continuous losses at Jeta Gardens and Sheikh Fazilatunnesa Mujib Memorial KPJ Specialized Hospital & Nursing College (Dhaka). Maintain MARKET PERFORM and target price of RM4.38 based on PER of 25x on FY18E EPS of 17.5 sen.

Key Result Highlights

QoQ, 2Q17 top-line came flat at RM793m (+0.1%) largely due to average revenue per outpatient (+0.9%) and inpatient (+0.8%) and offset by lower number of outpatients (-0.5%) and number of inpatients (-2.3%). Occupancy rate was flat at 67.7% compared to 68% in 1Q17. However, 2Q17 pre-tax margins fell 1%ppts to 6% from 7% in 1Q17 due to losses suffered at Jeta Gardens (retirement home in Australia, pre-tax loss of RM5.1m) and Sheikh Fazilatunnesa Mujib Memorial KPJ Specialized Hospital & Nursing College (Dhaka). This brings 2Q17 core PATAMI to RM32.2m and further exacerbated by a higher effective tax rate of 31% compared to 27% in 1Q17. A 1.5 sen single-tier DPS was declared bringing 1H17 DPS to 3.3 sen, which is within our expectation.

YoY, 1H17 revenue rose 5.2% largely due to a higher average revenue per outpatient and inpatient (+0.8%) and higher number of inpatients (+1.0%) which more than offset lower number of outpatients (-1.5%). This brings 1H17 core PATAMI to RM83.5m (+7% YoY) after excluding a one-off provision for ESOS payments of RM13.1m and RM13.8m as better performance in 1Q17 is tapering off of which we envisioned in 1Q17.

Outlook. Earnings growth is expected to be pedestrian over the next few quarters. Going forward, KPJ Perlis (greenfield, 90 beds) and KPJ Seremban (new block with additional 90 beds) are expected to commence operations by end 2017 and early 1Q18. Elsewhere, brownfield expansions include Taiping, Sri Manjung and KPJ Johor Bandar Dato Onn, expected to operate by end 2017 and early 2018. We expect performance in Indonesia to continue to remain volatile over the next several quarters due to lower bed utilisation of 40%.

Maintain MARKET PERFORM and target price of RM4.38 based on PER of 25x on our FY18E EPS of 17.5 sen. The stock is trading at 25.8x and 24.0x on FY17E and FY18E EPS compared to its net profit growth averaging 9.5% per annum over the next two years. Key risk to our call is faster-than-expected turnaround in the group’s new hospitals.

Source: Kenanga Research - 25 Aug 2017