9MFY20 Core Net Profit (CNP) of RM85m (-33% YoY) came in at 60%/61% of our/consensus estimates. The result is deemed within our expectation in anticipation of further recovery following the easing COVID-19 restrictions, and 2H has historically performed better than 1H (i.e. for past three years, 2H accounted for an average of 60% of full-year earnings). With lack of re-rating catalyst and pedestrian growth over the past several quarters, we downgrade the stock from Outperform to Market Perform. No changes to our earnings forecasts and TP of RM1.00 based on unchanged 25x FY21E EPS.

Key results’ highlights. QoQ, 3QFY20 revenue rose 36%, thanks to the easing to COVID-19 movement restrictions in early June resulting in total number of patients rising 36% from a low base in 2QFY20. This was contributed by the significant increase in surgeries cases by 52% to 22,858 cases in 3QFY20. Similarly, 3QFY20 average Bed- Occupation Rate (BOR) rose to 51% compared to 34% in 2QFY20 which is lower than pre-COVID of 66%. In line with the improved hospital business activities, the Group’s EBITDA and pre-tax profit rose 35% and 196%, respectively. This brings 3QFY20 net profit to RM34m (+168%) due to a lower effective tax rate of 37% compared to 42% in 2QFY20. A 3rd interim dividend of 0.4 sen share was declared bringing 9MFY20 DPS to 1.2 sen which is within our expectation.

YoY, 9MFY20 revenue fell 11%, no thanks to the COVID-19 Movement Control Order (MCO) resulting in lower inpatient, and outpatient decline. EBITDA fell 9% due to lower revenue while PBT declined at a faster pace of 34% due to lower activities in hospital operations during the MCO and RMCO periods and coupled with several expenses, such as staff costs, interest on lease liabilities, borrowing costs and depreciation which remain fixed despite the decline in business activities. The average Group’s BOR declined to 50% in 9MFY20 compared to 77% in 9MFY19. 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 9MFY20 PATAMI to RM85m (-33% YoY).

Outlook. As Malaysia’s MCO enters 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.

Downgrade from OUTPERFORM to MARKET PERFORM. With lack of re-rating catalyst and pedestrian growth over the past several quarters, we downgrade the stock from Outperform to Market Perform. No changes to our earnings forecasts and TP of RM1.00 based on unchanged 25x FY21E EPS.

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

Source: Kenanga Research - 1 Dec 2020