9MFY21 PATAMI of RM33m (-62% YoY) came in below expectations at 31%/34% of our/consensus estimates. The negative variance from our side was due to lower-than-expected number of patients and higher-than-expected effective tax rate. This prompts us to cut our FY21E/FY22E net profit by 19%/13%. TP is reduced from RM1.03 to RM1.01 based on 28x FY22E EPS in line with historical 5-year forward mean. On lack of re-rating catalyst coupled with its new hospitals still under gestation that are likely to continue dragging earnings, we reiterate Market Perform.

Key results’ highlights. QoQ, 3QFY21 revenue rose 10%, thanks to higher number of patients (+3%) and bed-occupancy rate (BOR) of 44% compared to 41% in 2QFY21. Correspondingly, 3QFY21 EBITDA and PBT rose 27% and >100% from a low base in 2QFY21, respectively, due to rental rebates received from Al-‘Aqar Healthcare REIT, and we believe from absence of start-up cost incurred for new hospitals namely, KPJ Sri Manjung and KPJ Taiping which were opened to the public in 2QFY21. This caused 3QFY21 PATAMI to come in below expectation at RM12.6m (+82%) due to a higher effective tax rate of 59% compared to 38% in 2QFY21 due to certain expenses not deductible for tax purposes, and the impact of business losses arising from the new hospitals that are currently under gestation. A 2nd interim dividend of 0.30 sen was declared bringing 9MFY21 DPS to 0.55 sen which came in below our expectation.

YoY, 9MFY21 revenue rose 9%, thanks to higher number of patients (+7%). Despite the increase in revenue, the desired optimal operating efficiency is yet to be achieved due to high fixed costs which comprise staff costs, maintenance costs and depreciation/amortisation and finance costs. Consequently, EBITDA and PBT fell 6% and 40%, 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 9MFY21 PATAMI lower by 62%.

Outlook. We expect a slow recovery in terms of hospital activities due to patient deferring seeking hospital treatments; however, with business activities resuming and the easing of restrictions, activities in the hospitals are expected to start recovering gradually towards the end of the year and into early 2022. Nevertheless, emergence of new variants of COVID-19 and surge in cases overseas could mean a slower recovery. Additionally, the new hospitals under gestation period could continue to be a drag on earnings.

Downgrade FY21E/FY22E net profit by 19%/13%. Our FY21E downgrade is due to lower number of patients and effective tax rate raised from 30% to 36%. We cut our FY22E net profit by 13% to account for one-off prosperity tax from the recently announced Budget 2022 as we assume an effective tax rate of 38% instead of 30% previously.

Reiterate MARKET PERFORM. Our TP is lowered from RM1.03 to RM1.01 based on 28x FY22 EPS in line with historical 5-year forward mean. 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 - 29 Nov 2021