FY20 Core Net Profit (CNP) of RM131m (-38% YoY) met expectations at 91%/100% of our/consensus estimates. The negative variance from our side was due to lower-than- expected bed occupancy ratio. With lack of re-rating catalyst and the new hospitals under gestation period could continue to be a drag to earnings, we reiterate our Market Perform call. We keep our FY21E/FY22E earnings forecasts and TP of RM1.00 based on unchanged 25x FY21E EPS.

Key results’ highlights. QoQ, 4QFY20 revenue fell 9%, no thanks to the to the reinstatement of CMCO in Nov 2020 as number of inpatients fell 11% leading to lower bed occupancy rate (48% vs 51% in 3QFY20). EBITDA fell to 20% due to lower revenue while PBT declined at a faster pace of 63% due to lower activities in hospital operations coupled with several fixed expenses, such as staff costs, interest on lease liabilities, borrowing costs and depreciation. The lower PBT was further exacerbated by impairment loss from investment of quoted and unquoted shares (RM3.6m), the impairment loss on land by Jeta Gardens (RM17m) and a contribution decline in associate (Al-‘Aqar Healthcare REIT). This brings 4QFY20 Core Net Profit to RM46m (+35%) due to a positive tax writeback due to recognition of tax credits arising from the recognition of investment tax allowances. A 3rd interim DPS of 0.4 sen was declared and fully paid on 31 Dec 2020 bringing FY20 DPS to 1.2 sen.

YoY, FY20 revenue fell 12%, no thanks to the COVID-19 Movement Control Order (MCO) in 2QFY20 resulting in lower patient visits (-9%) and lower inpatient, resulting in lower bed occupancy ratio (48% in FY20 vs 66% in FY19). EBITDA fell 16% due to lower revenue while PBT declined at a faster pace of 45% 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 remained fixed despite the decline in business activities. The lower PBT was further exacerbated by impairment loss from investment of quoted and unquoted shares RM3.6m), the impairment loss on land by Jeta Gardens (RM17m) and a decline in associate contribution (Al-‘Aqar Healthcare REIT). In addition, its new hospitals still under gestation period, such as KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri, remained loss-making, contributed to the lower EBITDA. This brings core FY20 PATAMI to RM131m (-38% YoY).

Outlook. Looking ahead into 2021, the Group will continue to take advantage of Governments’ incentives in order to mitigate the adverse effects of the pandemic. Under the PERMAI assistance package announced by the Government in January 2021, the Group has offered to collaborate with the government hospitals to treat non-COVID-19 patients in an effort to alleviate the strain on the public healthcare system. However, the new hospitals under gestation period could continue to be a drag to earnings.

Reiterate MARKET PERFORM. With lack of re-rating catalyst and the new hospitals under gestation period could continue to be a drag to earnings, we reiterate our Market Perform call. We keep our FY21E/FY22E 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 - 19 Feb 2021