1HFY21 PATAMI of RM20m (-61% YoY) came in below expectations at 14%/17% of our/consensus estimates. The negative variance from our side was due to higher-than- expected operating expenses. This prompts us to cut our FY21E net profit forecasts by 29%. No change to our FY22E earnings. TP is RM1.03 based on unchanged 25x FY22E EPS. Lack of re-rating catalyst coupled with its new hospitals currently under gestation potentially dragging earnings, we reiterate Market Perform.

Key results’ highlights. QoQ, 2QFY21 revenue rose 4%, thanks to higher number of patients (+6%) despite the re-imposition of MCO and a full lockdown in June. 2QFY21 EBITDA and PBT fell 7% and 30%, respectively, due to higher costs associated with COVID crisis management at the hospitals which resulted in additional costs arising from drugs, medical supplies and direct manpower costs and higher depreciation from additional beds, new medical equipment and upgrading of facilities at some of their existing hospitals, namely, KPJ Sri Manjung and KPJ Taiping which were opened to the public. This brings 2QFY21 PATAMI to RM7m (-46%) due to a higher effective tax rate of 38% compared to 24% in 1QFY21. A 1st interim dividend of 0.25 sen was declared in 2QFY21 (1HFY21: 0.25 sen compared to 1HFY20: 0.80 sen). Note that no dividend was declared in 1QFY21.

YoY, 1HFY21 revenue rose 9%, thanks to higher number of patients (+17%). Despite the increase in revenue, the operating efficiency is yet to be achieved due to high fixed costs which comprises of staff costs, maintenance costs and depreciation/amortisation and finance costs. Consequently, EBITDA and PBT fell 8% and 54%, respectively, which was further exacerbated by lower contribution from new hospitals under gestation period. 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 weighing 1HFY21 PATAMI lower by 61%.

Outlook. The current rise in infection rates locally and movement control measures implemented to curb the spread COVID-19 is creating a challenging environment. Additionally, the new hospitals under gestation period could continue to be a drag on earnings.

Downgrade FY21E net profit by 29%. 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 net profit by 29% to account for lower volume of patients. No change to our FY22E earnings.

Reiterate MARKET PERFORM. TP is maintained at RM1.03 based on unchanged 25x FY22 EPS. 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 - 25 Aug 2021