FY19 Core Net Profit (CNP) of RM211m (+18% YoY) beat both our and consensus expectations by 10% and 15%, respectively. On our end, this is due to an unexpected tax credit from recognition of investment tax allowance in 4QFY19. By the same token, we raise our FY20E net profit by 5%. TP is raised to RM1.20 from RM1.15 based on 25.5x FY20E EPS (historical average 5-year forward PER). Maintain OP.

Key results’ highlights. QoQ, 4QFY19 revenue rose 4% due mainly to higher outpatient volume (+0.3%) in Malaysia. Higher revenue was steered by increase in number of patient visits, radiology cases and surgeries performed especially for KPJ Johor, KPJ Rawang and KPJ Selangor. KPJ Batu Pahat and KPJ Seremban which opened in 4QFY19 started contributing to the Malaysia segment. EBITDA rose 16% which helped raise PBT by 9%. 4QFY19 CNP rose 76% to RM84m helped by an unexpected tax credit from recognition of investment tax allowance. A 4th single-tier 0.5 sen DPS was declared in this quarter which brings FY19 DPS to 2.0 sen which is within our expectation.

YoY, FY19 revenue rose 7% due mainly to the higher average inpatient volume (+6%), higher radiology cases and surgeries performed especially for KPJ Rawang, Batu Pahat, Perlis and Bandar Dato Onn. KPJ Batu Pahat which opened on 18 September 2019 has started contributing to the Malaysia segment’s revenue alongside other newlyopened hospitals such as KPJ Perlis and KPJ Bandar Dato’ Onn. EBITDA rose 29% 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 neighbouring country and online promotions as well as organic growth from existing hospitals were also contributing factors to the increase in revenue. FY19 CNP grew 18% YoY to RM211m due to a lower effective tax rate of 18% compared to 28% in FY18. FY19 EBITDA margin rose 3ppt to 18% from 15% in FY18 from adoption of MFRS 16 and possibly on 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 their new hospitals will be absorbed by: (i) incremental ramp-ups from earlier openings, and (ii) steady contributions from matured hospitals. As an indication, start-up 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.

Raise FY20E net profit by 5% after taking into account the remaining balance unused portion of the investment tax allowance to lower the effective tax rate from 33% to 30%.

Maintain OUTPERFORM. TP is raised to RM1.20 from RM1.15 based on unchanged 25.5x 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 25.5x 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 - 27 Feb 2020