1HFY20 Core Net Profit (CNP) of RM51.2m (-37% YoY) came in at 25%/35% of our/consensus estimates. The result is deemed below our expectation due to lower-than-expected volume from patients treated in the 1H. Despite the historical trend of 2H being normally the stronger half (eg. for past three years, 2H accounted for between 53%-62% of full-year earnings), we do not expect the higher pick up in the next half to meet our full year estimates. Hence, we cut our FY20E/FY21E net profit by 29%/24% to account for lower volume of patients. Correspondingly, TP is cut from RM1.20 to RM1.00 based on unchanged 25x FY20E EPS. Maintain OP.

Key results’ highlights. QoQ, 2QFY20 revenue fell 29%, no thanks to the COVID-19 Movement Control Order (MCO) resulting in lower inpatient, and outpatient decline. During the lockdown period, all elective procedures were postponed or delayed and hospitals were focusing on the critical and life-threatening cases; hence, the average bed occupancy rate in 2QFY20 was at 34%, significantly lower compared to the normalised average 60-65%. As a result, EBITDA fell 27% due to the decline in revenue while fixed costs remained, and additional expenses incurred since the outbreak, such as costs of personal protective equipment for the front-liners, COVID-19 test kits and other consumable items. No dividend was declared in this quarter as expected. This brings 2QFY20 net profit to RM12.7m (-67%) further exacerbated by a higher effective tax rate of 42% compared to 26% in 1QFY20.

YoY, 1HFY20 revenue fell 13%, no thanks to the COVID-19 Movement Control Order (MCO) resulting in lower inpatient, and outpatient decline. EBITDA fell 13% due to lower revenue while PBT declined at a faster pace of 42% on stable fixed costs and additional expenses incurred since the outbreak, such as costs of personal protective equipment for the front-liners, COVID-19 test kits and other consumable items. In addition, the new hospitals still under gestation period, such as KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri, remain loss-making, contributed to the lower EBITDA. This brings 1HFY20 PATAMI to RM51m (-37%).

Outlook. As Malaysia’s MCO has entered into the recovery phase from 10 June 2020, the Group saw an increase in its hospital activities and this was evidenced with revenue in June 2020 climbing to RM259m. 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.

Maintain OUTPERFORM but cut FY20E/FY21E net profit by 29%/24%. We cut our FY20E/FY21E net profit by 29%/24% to take into account lower volume of patients. Correspondingly, TP is cut from RM1.20 to RM1.00 based on unchanged 25x FY20E EPS (historical average 5-year forward PER). We still 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 20% to the historical average.

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

Source: Kenanga Research - 28 Aug 2020