1H18 core PATAMI of RM91.1m (+5% YoY) came in above expectations at 52%/51% of our/consensus full-year net profit forecasts. Consequently, we upgrade our FY18E/FY19E net profit by 5.3%/11.0% due to better-thanexpected improvement in newly opened hospitals. TP is raised from RM1.08 to RM1.35 based on 28x FY19E EPS (historical average 5-year forward PER). Upgrade from Market Perform to Outperform.

1H18 core PATAMI of RM91.1m (+5% YoY) came in above expectations at 52%/51% of our/consensus full-year forecasts. The positive variance from our estimate was due to better-than-expected margins as cost optimisation initiatives by the hospitals, mainly the new hospitals which were under gestation period are bearing fruits. A single- tier 0.5 sen DPS was declared in this quarter, bringing 1H18 DPS to 1.0 sen which is within our expectations.

Key result highlights. QoQ, 2Q18 revenue fell 3% largely due to lower contribution from Malaysia (-2.5%) on lower inpatient and outpatient numbers due to the long holiday during the festive season. The lower average revenue per outpatient (-2.5%) was buffered by higher average revenue per inpatient (+1%). This brings 2Q18 core PATAMI excluding share based payments (2Q18: RM3.2m; 1Q18 : RM3.1m) to RM45.8m (+1.1%).

YoY, 1H18 revenue rose 3.3% due mainly to the higher number of complex cases per inpatient, particularly for KPJ Rawang, KPJ Pasir Gudang and KPJ Bandar Maharani with expansion of beds by 45% as compared to the number of beds in 2017. The increase in revenue was also attributed by the organic growth from the existing hospitals. This brings 1H18 core PATAMI excluding share based payments (1H18: RM6.3m vs. 1H17: RM13.2m) to RM91m (+5%) due to better cost optimisation (1H18 EBITDA margin rose 2ppt to 15% from 13% in 1H17) mainly from the new hospitals which were under gestation period and higher share of results of associates (+16% YoY) during the period coupled with a lower effective tax rate of 26% compared to 28% in 1H17.

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. KPJ Perlis (greenfield, 90 beds) has commenced operations in 2Q 2018. Elsewhere, brownfield expansions include KPJ Miri and KPJ Johor Bandar Dato Onn which are expected to start operating by 1Q 2019. KPJ Kuching are both expected to commence operations by 2Q 2019.

Upgrade our FY18E/FY19E net profit by 5.3%/11.0% due to better- than-expected improvement in newly opened hospitals.

Upgrade to OUTPERFORM. Correspondingly, TP is raised from RM1.08 to RM1.35 based on revised 28x FY19E EPS (historical average 5-year forward PER). Our upgrade includes raising our target PER multiple from 25x to 28x as cost optimisation initiatives mainly the new hospitals which were under gestation period are bearing fruits. Upgrade from Market Perform to Outperform. The stock is currently trading at 15% and 40% discount compared to its historical average of 28x and regional peers of 35x, respectively. The 40% discount to regional peers is wider compared to the historical average of 30%.

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

Source: Kenanga Research - 17 Aug 2018