1Q18 core PATAMI of RM45.3m (-15.0% YoY; -26.1% QoQ) came in within expectations at 26% each of our/consensus full-year net profit forecasts. The stock is currently trading at 20% and 44% discount compared to its historical average of 25x and regional peers of 35x, respectively. Roll-forward our valuation from FY18E to FY19E. TP raised from RM1.050 to RM1.080 based on 25x FY19E EPS (-0.5SD to historical average 5-year forward PER). Reiterate OUTPERFORM.

1Q18 results came in within expectations. 1Q18 core PATAMI of RM45.3m (-15.0% YoY; -26.1% QoQ) came in within expectations at 26% each of our/consensus full-year net profit forecasts. A single-tier 0.5 sen DPS was declared in this quarter, which is within our expectation.

Key Result Highlights. YoY, 1Q18 revenue rose 6% largely due to a higher contribution from Malaysia (+6.3%) which accounted for 97% of revenue which more than offset a weaker Indonesia (-18.6%). The higher revenue was underpinned by higher inpatient admission (+5.2%) and average revenue per inpatient (+0.4%). Specifically, revenue was driven by KPJ Rawang with 128 beds (+45% YoY). Other hospitals that recorded double-digit growth rates in the number of inpatients are KPJ Tawakkal, KPJ Klang, KPJ Pasir Gudang and KPJ Bandar Maharani, that also translated to significant increment in revenue for this quarter. The Indonesian operations reported a decrease of 18% in revenue mainly contributed by a lower number of patients in Rumah Sakit Medica Bumi Serpong Damai. This brings 1Q18 core PATAMI excluding share based payments (1Q17: RM13.2m; 1Q18 : RM3.1m) to RM45.3m (-15%) due to higher depreciation and finance costs.

QoQ, 1Q18 PBT fell 21% due to higher profit sharing from associates in 4Q17 (1Q18 : RM9.3m vs 4Q17 : RM16.1m). Correspondingly, core PATAMI fell 26% due to slightly higher effective tax rate of 26% compared to 25% in 1Q17.

Outlook. Earnings growth is expected to come from narrower losses and profitability for hospitals built 2-3 years ago including KPJ Rawang, Maharani, Pasir Gudang and Pahang. Going forward, KPJ Perlis (greenfield, 90 beds) is expected to commence operations by end 2Q 2018. Elsewhere, brownfield expansions include Taiping, Sri Manjung and KPJ Johor Bandar Dato Onn which are expected to start operating by 3Q 2018. KPJ Miri and KPJ Kuching are expected to commence operations by 2Q 2019 each. The stock is currently trading at 20% and 44% discount compared to its historical average of 25x and regional peers of 35x, respectively. The 44% discount to regional peers is wider compared to the historical average of 30%.

Reiterate OUTPERFORM. We roll forward our valuation from FY18E to FY19E. Correspondingly, our TP is raised from RM1.050 to RM1.080 based on unchanged PER of 25x FY19E EPS (-0.5SD to its 5-year forward PER band). The stock is currently trading at 20-21x forward PER compared to its historical average of 28x.

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

Source: Kenanga Research - 31 May 2018