1QFY21 PATAMI of RM13m (-66% YoY; -49% QoQ) came in below expectations at 8% each of our and consensus estimates. The negative variance from our side was due to lower-than-expected patients. This prompts us to cut our FY21E/FY22E net profit forecasts by 12%/9%%. Our TP is raised from RM1.00 to RM1.03 based on unchanged 25x PER as we roll forward our valuation from FY21E to FY22E. Lack of re-rating catalyst coupled with its new hospitals currently under gestation potentially dragging earnings, we reiterate Market Perform.

Key results’ highlights. QoQ, 1QFY21 revenue fell 3%, no thanks to the re-imposition of MCO in January for certain states in the country and almost all states throughout February, resulting in weaker overall results as number of patients fell 7%. This brings 1QFY21 Core Net Profit to RM13m (-49%) due to a higher effective tax rate of 24% compared to a positive tax writeback due to recognition of tax credits arising from the recognition of investment tax allowances in 4QFY20. No dividends was declared in this quarter (1QFY20: 0.5 sen).

YoY, 1QFY21 revenue fell 9%, no thanks to the re-imposition of COVID-19 Movement Control Order (MCO) beginning 5 Mar 2021 resulting in lower patient visits (-4%), resulting in lower bed occupancy ratio (39% in 1QFY21 vs. 69% in 1QFY21). EBITDA fell 18% due to lower revenue while PBT declined at a faster pace of 63% due to lower activities in hospital operations during the MCO. Several expenses, such as staff costs, interest on lease liabilities, borrowing costs and depreciation had also remained fixed despite the decline in business activities. The lower PBT was further exacerbated by a decline in associate contribution (Al-‘Aqar Healthcare REIT) (-37%). In addition, its new hospitals still under gestation, such as KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri, remained loss-making, contributing to the lower EBITDA. This brings 1QFY21 PATAMI lower by 66%.

Outlook. The current rise in infection rates locally and subsequent movement control measures implemented to curb the spread COVID- 19 over the next few months create a challenging environment. 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 on earnings.

Downgrade FY21E/FY22E net profit by 12%/9%. Despite the historical trend of 2H being normally the stronger half (e.g. for past three years, 2H accounted for between 53%-62% of full-year earnings), we do not expect the pick-up in the next half to help meet our full-year estimate. Hence, we cut our FY21E/FY22E net profit by 12%/9% to account for lower volume of patients.

Reiterate MARKET PERFORM. Our TP is raise from RM1.00 to RM1.03 based on unchanged 25x FY22 EPS as we roll forward our valuation from FY21E to FY22E. With lack of re-rating catalyst and the new hospitals under gestation period which could continue to be a drag to earnings, we reiterate our Market Perform call.

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

Source: Kenanga Research - 27 May 2021