FY17 core net profit of RM595.3m (-31% YoY) came in below expectations at 82%/88% of our/consensus full-year forecasts. The negative variance from our forecast is due to higher-than-expected operating cost. This quarter marked the fourth consecutive quarterly earnings disappointment. Hence, we cut our FY18E/FY19E NP by 12%/9% to take into account lower margins. TP is also reduced from RM5.00 to RM4.90 based on SoP. Reiterate UNDERPERFORM.

FY17 missed expectations. FY17 core net profit of RM595.3m (-31% YoY) came in below expectations at 82%/88% of our/consensus full- year forecasts. The negative variance from our forecast is due to higher-than-expected operating cost. A first and final dividend of 3.0 sen/share was declared in this quarter as expected.

Key Result Highlights. QoQ, 4Q17 revenue rose 3%, rebounding from the seasonal lows in 3Q17 due to summer months in Turkey. The better top-line growth was driven by inpatient intensity in Turkey (inpatient admission rose 12%) which more than offset the lacklustre performance in Parkway Pantai Singapore (-0.2%) and Malaysia (+1.8%). Parkway Pantai India Hospital’s inpatient admissions fell 10.9%, while its revenue per inpatient admission increased 8.3%. EBITDA rose 9% due to a RM6.4m revaluation gain arising from PLife REIT’s investment properties as well as RM4.5m gain on divestment of Eurobonds and Money Market funds in 4Q17. Excluding exchange loss on net borrowings (RM176.9m) and fair value changes in investment properties (RM16.5m), 4Q17 core PATAMI came in at RM80.6m (+36%) dragged down by higher finance cost (+56%) .

YoY, 12M17 revenue rose 11% underpinned by organic growth from its existing operations, and the continuous ramp up of the hospitals opened in 2017 including Tokuda and City Clinic Group in Bulgaria. EBITDA was flat due to start-up costs from Gleneagles Hong Kong Hospital, and higher operating and staff costs. This brings FY17 core PATAMI to RM595.3m (-31%) excluding gains from divestment of Apollo (RM554.5m) and further dragged down by incremental depreciation, amortisation and finance costs with the opening of the two new hospitals in March 2017.

Outlook. We expect pipeline of expansion projects in Malaysia and Turkey, and the Group has sufficient capacity to meet demand, which would drive revenue growth. However, over the short-to-medium term, higher costs of operations arising from wage inflation as a result of increased competition for trained personnel and start-up costs on pre- opening of hospitals, including Gleneagles Hong Kong (GHK) will put pressure on cost and margins at least over the short term. GHK has gradually taken on more complex cases and is expected to increase revenue as it ramps up operations.

Downgrade FY18E/FY19E net profit by 12%/9%. We cut our FY18E/FY19E net profit forecasts by 12%/9% to take into account higher operating cost.

Maintain UNDERPERFORM. Correspondingly, our TP is reduced from RM5.00 to RM4.90 based on sum-of-parts valuation.

Key upside risk to our call: higher-than-expected margin.

Source: Kenanga Research - 28 Feb 2018