• FY16 earnings came in within expectation

• FY17-18 earnings forecasts under review with downside bias as expansion plans may slow while margins may be lower

• Maintain our HOLD recommendation and TP of RM4.60 pending upcoming meeting with management

What's New

• Stripping out various adjustments – including disposal gain from its 6% stakes in Al-Aqar Healthcare REIT – KPJ Healthcare recorded core earnings of RM43m in 4Q16 (+74% y-o-y), mainly supported by higher revenue (+7.3% y-o-y) and a lower effective tax rate (13% in 4QFY16 vs 35% in 4QFY15).

• This brings its FY16 core earnings to RM140m, which came in within our and market expectations.

• 4Q revenue rose by 7.3% y-o-y to RM745m, thanks to improved topline contributions from most of its healthcare operations – Malaysia (+5%), Indonesia (+13%), Australia (22%), and others (12%).

• Inpatient volume and outpatient volume remained flat for FY16, compared with FY15. The average length stay dropped 1.6% to 2.53 days for FY16.

• Gross margin for the FY16 inched up 70bps y-o-y to 29.7%.

• Although FY16 earnings met our expectations, we believe that there could be downside risks to our FY17-18 earnings forecasts – (1) our topline growth assumption could be overly optimistic as the group may scale back its expansion plans going forward, and (2) margin could be too high since it could take longer than expected gestation period for the new hospitals to breakeven.

• We are maintaining our earnings forecasts for now, pending an upcoming meeting with management.

Valuation

We put our HOLD rating and TP of RM4.60 under review, pending on an upcoming meeting with management.

Key risk

Longer-than-expected gestation period for new hospitals. A new hospital takes around 3-5 years to be profitable. KPJ’s near-term earnings could be hit by high start-up losses at its new hospitals, if the gestation period turns out to be longer than expected, or if its expansion plan proves to be too rapid.

Source: Alliance Research - 22 Feb 2017