FY18 Core Net Profit (CNP) of RM183m (+2.4% YoY) came in within expectations at 100%/102% of our/consensus fullyear forecasts. The stock is currently trading at 15% and 40% discounts compared to its historical average of 28.5x 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 28.5x FY19E EPS (historical average 5-year forward PER). Maintain OP.

FY18 Core Net Profit (CNP) of RM183m (+2.4% YoY) came in within expectations at 100%/102% of our/consensus full-year forecasts. A single-tier 0.5 sen DPS was declared in this quarter, bringing FY18 DPS to 2.0 sen which is within expectation.

Key results highlights. QoQ, 4Q18 revenue rose 5.2% mainly contributed by the increase of inpatient (+35%) and outpatient (+35%) numbers in Malaysia which more than offset lower average revenue per inpatient (-3%) and outpatient (-4%), respectively. This brings 4Q18 core PATAMI excluding share-based payments (4Q18: RM3.5m; 3Q18: RM3.1m) and fair value gain on investment properties (RM11.5m) to RM47.1m (+5.1%) due to the lower effective tax rate of 28% compared to 34% in 3Q18.

YoY, FY18 revenue rose 4% 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 as well as organic growth from existing hospitals are also contributing factors to the increase in revenue. This brings FY18 core PATAMI excluding share-based payments (FY18: RM12.9m vs. FY17: RM13.2m) and fair value gain on investment properties (RM11.5m) to RM183m (+2.4%) due to better cost optimisation (FY18 EBITDA margin rose 1ppt to 15% from 14% in FY17) from the new hospitals previously under gestation and incremental ramp ups from new openings.

Outlook. The group is confident that start-up costs from new openings will be absorbed by: (i) incremental ramp-ups from earlier openings, and (ii) steady contributions from matured hospitals. 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). Elsewhere, brownfield expansions include KPJ Miri (96 beds) and KPJ Kuching (150 beds) which are expected to start operating by 2Q 2019. KPJ Bandar Dato Onn has commenced operation in end 4Q 2018.

Maintain OUTPERFORM. The stock is currently trading at 15% and 40% discount compared to its historical average of 28.5x 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 28.5x 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 - 20 Feb 2019