9MFY19 Core Net Profit (CNP) of RM131m (+4% YoY) came in at 68%/71% of our/consensus full-year forecasts. The result is deemed to be within our expectation as historically 4Q is seasonally the strongest quarter. As in the past 3 years, we expect this 2H to outperform 1H again with 2H estimated to account for 56% of full-year earnings. TP is maintained at RM1.15, based on unchanged 26.5x FY20E EPS (historical average 5-year forward PER). Maintain OP.

Key results’ highlights. QoQ, 3QFY19 revenue rose 7% mainly due to higher inpatient (+11%) and outpatient (+5%) volumes in Malaysia as occupancy rates rose 2ppt to 68% which more than offset lower average revenue per inpatient (-0.9%). Higher revenue was steered by the increase in number of patient visits, radiology cases and surgeries performed especially for KPJ Johor, KPJ Rawang and KPJ Selangor. KPJ Batu Pahat which opened on 18 September 2019 has started contributing to the Malaysia segment. EBITDA came in at RM157m (+1%). This helped raise PBT by 8%.3QFY19 CNP rose 11% to RM48m helped by the lower effective tax rate of 29% compared to 31% in 2QFY19. A 3rd single-tier 0.5 sen DPS was declared in this quarter which brings 9MFY19 DPS to 1.5 sen which is within our expectation.

YoY, 9MFY19 revenue rose 7% due mainly to the higher average inpatient (+6%), higher radiology cases and surgeries performed especially for KPJ Johor, KPJ Rawang and KPJ Selangor. KPJ Batu Pahat which opened on 18 September 2019 has started contributing to the Malaysia segment’s revenue alongside other newly-opened hospitals such as KPJ Perlis and KPJ Bandar Dato’ Onn. 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. 9MFY19 CNP grew a modest 4% YoY to RM131m due to a higher effective tax rate of 31% compared to 29% in 9MFY18. 9MFY19 EBITDA margin rose 3ppt to 18% from 15% in 9MFY18 from adoption of MFRS 16 and possibly 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 RM1.15 based on unchanged 26.5x FY20E EPS (historical average 5-year forward PER). 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 - 29 Nov 2019