FY21 PATAMI of RM51m (-54% YoY) came in below expectations, at 60%/84% 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 FY22E net profit by 29%. TP is raised from RM1.01 to RM1.04 based on 30x FY22E EPS, in line with historical 5-year forward mean (roll forward from FY22E to FY23E). On lack of re- rating catalyst coupled with its new hospitals still under gestation likely to continue dragging earnings, we reiterate MARKET PERFORM.

Key results’ highlights. QoQ, 4QFY21 revenue fell 1%, no thanks to lower revenue contribution from sale of a subsidiary resulting in lower pharmaceutical contribution despite higher number of inpatients (+29%). Outpatient visits were relatively flat at 730,992 during the quarter compared to 727,512 visits reported in the third quarter of 2021. Correspondingly, 4QFY21 EBITDA and PBT rose 6% and 13%. This caused 4QFY21 PATAMI to come in below expectation at RM18.5m (+46%) due to a lower effective tax rate of 37% compared to 59% in 3QFY21 and the impact of business losses arising from the new hospitals that are currently under gestation. A 3rd interim dividend of 0.20 sen was declared bringing FY21 DPS to 0.75 sen which came in below our expectation.

YoY, FY21 revenue rose 10%, thanks to higher number of patients (+6%). 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 2% and 23%, 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 FY21 PATAMI lower by 54%.

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 2023. 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 FY22E net profit by 29%. Our FY22E earnings downgrade is due to lower number of patients and effective tax rate raised from 36% to 37%. We also introduce our FY23E earnings.

Reiterate MARKET PERFORM. Our TP is raised marginally from RM1.01 to RM1.04 based on 30x FY23E EPS in line with historical 5- year forward mean (roll forward from FY22E to FY23E). 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 - 21 Feb 2022