1H19 Core Net Profit (CNP) of RM83.4m (-2% YoY) came in within expectations at 43%/45% of our/consensus full-year forecasts. The result is deemed within our expectation as historically, 2H performed better than 1H based on the past three years when 2H accounted for 56% of full-year earnings. TP is cut from RM1.20 to RM1.15 based on revised lower 26.5x FY20E EPS (historical average 5-year forward PER) from 27.5x previously. Maintain OP.

1H19 Core Net Profit (CNP) of RM83.4m (-2% YoY) came in within expectations at 43%/45% of our/consensus full-year forecasts. The result is deemed within our expectation as historically, 2H performed better than 1H where the past three years’ 2H accounted for 56% of full-year earnings. A 2nd single-tier 0.5 sen DPS was declared in this quarter. This brings 1H19 DPS to 1.0 sen which is within our expectation.

Key results highlights. QoQ, 2Q19 revenue fell 2% mainly due to lower inpatient (-2%) and outpatient (-1%) numbers in Malaysia as occupancy rates fell 2ppt to 66%. EBITDA came in unchanged at RM155m. This brings 2Q19 core PATAMI to RM43m (+7%) due to the lower effective tax rate of 31% compared to 32% in 1Q19.

YoY, 1H19 revenue rose 5% due mainly to the higher average revenue per inpatient (+6.5%), particularly for KPJ Rawang, KPJ Pasir Gudang and KPJ Johor. In addition, the newly-opened hospitals; namely KPJ Perlis and KPJ Bandar Dato’ Onn, were also contributing factors to the double-digit increment to the revenue. Increased activities at the support companies also contributed to the revenue growth. EBITDA rose 30% due to impact of MFRS 16 adoption since the Group does not recognised lease rental but instead recognised depreciation and finance costs derived from the right-of-use assets and lease liabilities, respectively. Extended promotions to the neighbouring country and online promotions as well as organic growth from existing hospitals were also contributing factors to the increase in revenue. This brings 1H19 PATAMI to RM83.4m (-2%) due to the higher effective tax rate of 31% compared to 26% in 1Q18. 1H19 EBITDA margin rose 3ppt to 18% from 15% in 1H18 from adoption of MFRS 16 and potentially contributions 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. As indication, startup losses are only seen in KPJ Perlis and Bandar Dato Onn. 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.

Maintain OUTPERFORM. TP is cut from RM1.20 to RM1.15 based on revised lower 26.5x FY20E EPS (historical average 5-year forward PER) from 27.5x PER previously. We like KPJ because: (i) start-up costs from new openings are diminishing, being absorbed by incremental ramp-ups from earlier openings and steady contributions from matured hospitals, and (ii) the stock is currently trading at 25% and 40% discount compared to the historical average of 26.5x and regional peers of 35x, respectively.

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

Source: Kenanga Research - 3 Sept 2019