1QFY20 Core Net Profit (CNP) of RM38.5m (-2% YoY) came in at 19%/21% of our/consensus. The result is deemed within our expectation as historically 2H had normally performed better than 1H (i.e. for past three years, 2H accounted for an average of between 53%-62% of full-year earnings). TP is RM1.20 based on 25x FY20E EPS (historical average 5-year forward PER). Maintain OP.

Key results’ highlights. QoQ, 1QFY20 revenue fell 6% due the COVID-19 Movement Control Order (MCO) no thanks to inpatient and outpatient declines. In January and February, the group recorded combined revenue of RM616m. However, due to Covid-19 pandemic, the government of Malaysia declared a Movement Control Order (MCO) from 18 March 2020 onwards and this has affected the Group revenue, which resulted in lower revenue in the month of March at RM268m. EBITDA fell 15% due to additional expenses incurred in respect of the Covid-19 pandemic. A 1st single-tier 0.3 sen DPS was declared in this quarter which is within our expectation

YoY, 1QFY20 revenue rose 0.4% on higher activity at the hospitals, mainly from the Malaysia segment in tandem with increased number of outpatients and inpatients’ procedures performed. EBITDA fell marginally due to additional expenses incurred mainly from the increase in the purchase of material costs, personal protection equipment for the front liners, ventilator machines, thermo scanners, surgical masks and hand sanitizers. The Group also contributed in terms of providing additional manpower, loaning of equipment and cash donations to the Ministry of Health (MOH) in managing the pandemic. However, PBT fell 14% due to lower associates. This brings 1QFY20 PATAMI to RM38.5m (-2%) mitigated by a lower effective tax rate of 26% compared to 32% in 1QFY19.

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 were only seen in KPJ Perlis and Bandar Dato Onn. Earnings growth is expected to come from narrowing losses and profitability for hospitals built 2-3 years ago including KPJ Rawang, Maharani, Pasir Gudang and Pahang.

Maintain OUTPERFORM. We keep our earnings forecast unchanged. TP is RM1.20 based on unchanged 25x 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% discounts 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 - 11 Jun 2020