1QFY22 PATAMI of RM22m (+70% YoY; +20% QoQ) came in at 18%/14% of our/consensus estimates. We consider the results to be within our expectation as earnings are expected to pick up following the reopening of the economy. However, due to lack of catalysts coupled with its new hospitals (still under gestation) likely to continue dragging earnings, we reiterate MARKET PERFORM. We conservatively reduce our TP from RM1.04 to RM0.97 based on 28x FY23E EPS.

Key results’ highlights. YoY, 1QFY22 revenue rose 7%, thanks to higher revenue contribution from Malaysia as inpatients rose 13% and bed occupancy rate increased to 48% from 35% in 1QFY21 while surgeries and deliveries rose 9% and 7%, respectively. Correspondingly, 1QFY22 EBITDA and PBT rose 21% and 89% from low base effect, respectively. This brings 1QFY22 PATAMI to RM22m (+70% YoY). A 1st interim dividend of 0.20 sen was declared which came in within our expectation.

QoQ, 1QFY22 revenue fell 6%, no thanks to lower number of patients (- 8%) due to the surge of COVID-19 cases during the quarter brought about by the Omicron variant that affected the level of activities at the hospitals. This also led to lower level of surgery cases. EBITDA rose 9% due to improved revenue intensity and cost efficiency. However, PBT fell 1% due to additional depreciation cost and interest on lease liabilities arising from the lease commitment of a new hospital, Damansara Specialist Hospital 2. We believe new hospitals still under gestation, such as KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri, remained loss-making. This brings 1QFY22 net profit higher by 20% due to a lower effective tax rate of 31% compared to 37% in 4QFY21.

Outlook. Despite the increase in revenue, the desired optimal operating efficiency might yet to be achieved due to high fixed costs which comprise staff costs, maintenance costs and depreciation/amortisation and finance costs. We expect a slow recovery in terms of hospital activities due to patient deferring 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.

Reiterate MARKET PERFORM. However, due to lack of catalysts coupled with its new hospitals still under gestation likely to continue dragging earnings, we reiterate MARKET PERFORM. We conservatively reduce our TP from RM1.04 to RM0.97 based on 28x FY23E EPS marginally lower than its historical 5-year forward mean of 30x.

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

Source: Kenanga Research - 27 May 2022