FY17 PATAMI of RM165.6m (+8% YoY) beat our/ consensus full-year net profit forecast by 8%/11%. The positive variance from our results was due to better-than-expected improvement in newly opened hospitals. Upgrade our FY18E/FY19E net profit by 9.8%/8.6%. TP raised from RM1.00 to RM1.05 based on an unchanged PER of 25x on FY18E revised EPS. Upgrade from MARKET PERFORM to OUTPERFORM.

FY17 above expectations. 12M17 PATAMI of RM165.6m (+8% YoY) beat our/ consensus full-year net profit forecast by 8%/11%. The positive variance from our results was due to better-than-expected margins. A single-tier 0.5 sen DPS was declared bringing FY17 DPS to 1.7 sen, which is within our expectation.

Key Result Highlights. QoQ, 4Q17 top-line rose 5% largely due to mainly contributed by the increase in number of patients and complex cases per inpatient in line with more promotional activities and healthcare tourism effort during the year. Occupancy rate was flat at 65%. 4Q17 EBITDA showed a marked sequential improvement in line with the increase in revenue. This improvement was contributed by the increase in number of patient visits at the hospitals. Correspondingly, Profit before zakat and tax rose 51% underpin by margin improvement of hospitals within the Group, specifically from the new hospitals. PBT margin rose 3pp from 6% in 3Q17 to 9% in 4Q17 due to better-thanexpected improvement in newly opened hospitals. This brings 4Q17 PATAMI to RM61.3m (+100) boosted by a lower effective tax rate of 18% compared to 34% in 3Q17.

YoY, FY17 revenue rose 7% largely due to a higher average revenue per outpatient (+0.4%) and inpatient (+2.4%). In 2017, the new hospitals within the Group, such as KPJ Klang, KPJ Rawang, KPJ Pasir Gudang, KPJ Bandar Maharani and KPJ Pahang have shown tremendous improvement and contributed significantly to the Group’s revenue growth. This has resulted in an increase in profit before zakat and tax by 16% to RM249.2m in FY17, bringing FY17 PATAMI to RM165.6m (+8% YoY).

Outlook. Earnings growth is expected to be driven by 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.

Upgrade FY18E/FY19E net profit by 9.8%/8.6% to take into account better-than-expected margins.

Upgrade from MARKET PERFORM TO OUTPERFORM. Correspondingly, our TP is raised from RM1.00 to RM1.05 based on the unchanged PER of 25x on FY18E revised EPS (-0.5SD below historical average 5-year forward PER). We believe values are starting to emerge with the recent weakness in the share price following the just announced stellar FY17 result. The stock is current trading at 20-21x forward PER compared to its historical average of 26x.

Key risk to our call. Key risk to our call is faster-than-expected turnaround in the group’s new hospitals.

Source: Kenanga Research - 27 Feb 2018