9M18 Core Net Profit (CNP) of RM135.8m (+16% YoY) came in within expectations at 74%/75% of our/consensus fullyear forecasts. The stock is currently trading at 15% and 30% discounts compared to its historical average of 28x and regional peers of 35x, respectively. TP is RM1.35 based on 28x FY19E EPS (historical average 5-year forward PER). Maintain OP.

9M18 Core Net Profit (CNP) of RM135.8m (+16% YoY) came in within expectations at 74%/75% of our/consensus full-year forecasts. A single-tier 0.5 sen DPS was declared in this quarter, bringing 9M18 DPS to 1.5 sen which is above our expectation. We raised our DPS from 1.5 sen to 2.0 sen.

Key result highlights. QoQ, 3Q18 revenue rose 2.4% mainly contributed by the increase of inpatient (+51%) and outpatient (+50%) numbers in Malaysia. The higher average revenue per inpatient and outpatient rose 3.5% and 3.6%, respectively. This brings 3Q18 core PATAMI excluding share-based payments (3Q18: RM3.1m; 2Q18: RM3.2m) to RM44.8m (-2.2%) due to the higher effective tax rate of 34% compared to 27% in 2Q18.

YoY, 9M18 revenue rose 4.2% 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. Extended promotions to the neighbouring country and online promotions were also contributory factors to the increase in revenue boosted further by organic growth from the existing hospitals. This brings 9M18 core PATAMI excluding share-based payments (9M18: RM9.4m vs. 9M17: RM13.2m) to RM135.8m (+16%) due to better cost optimisation (9M18 EBITDA margin rose 2ppt to 15% from 13% in 9M17) mainly from the new hospitals which were under a gestation period.

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 (96 beds) and KPJ Kuching (150 beds) which are expected to start operating by 2Q 2019. Bandar Dato Onn is expected to open in end 4Q2018.

Maintain OP. The stock is currently trading at 15% and 40% discounts 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%. TP is RM1.35 based on 28x FY19E EPS (historical average 5-year forward PER).

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

Source: Kenanga Research - 30 Nov 2018