INVESTMENT HIGHLIGHTS

• 4QFY16 earnings within expectations

• Revenue increased across all markets

• Operational headline numbers remain stable

• FY17F earnings maintained

• Maintain NEUTRAL with revised TP of RM4.20 

Within expectations. KPJ’s 4QFY16 normalised earnings (after deducting a one-off gain of RM15.9m from the disposal of 6% stake in Al-Aqar REIT) came in at RM36.3m. This brings its FY16 normalised earnings to RM134.4m which is within our and consensus expectations, accounting for 96% of full year earnings forecasts respectively. Revenue and earnings increased year-over-year by +7.3% and +47.6% respectively. On a quarterly sequential basis, KPJ’s revenue declined marginally by -2.3% while earnings recorded an improvement of +11.7%.

Revenue increased across all markets. The increase in revenue for 4QFY16 was mainly due to the combination of organic growth from existing hospitals as well as the increasing revenue from newly opened hospitals across all of its markets. The revenue from Malaysian hospitals increased by +5.3% year-over-year due to the aforementioned reasons while the Indonesian operations revenue recorded an increase of +14.5% year-over-year mainly attributable to the increase in number of patients at both hospitals. Its Australian aged care service also reported an encouraging revenue growth of +27.9% year-over-year which was mainly attributed to the higher capacity of the retirement village, with additional beds which has been opened in phases from mid of 2015 until May 2016. PBT and net margins have also improved marginally both on a sequential and year-over-year basis due to the better revenue recorded.

Operational headline numbers remain stable. In 4QFY16, the quarter under review, we note that the number of admissions for both inpatient and outpatient was flat at -0.1%yoy and -0.5%yoy respectively due to persistent soft consumer sentiment. Inpatient admission was recorded at 279,419 for the FY16 vs 279,794 in FY15 while occupancy rate for beds declined to 66.2% (vs 67.8% in FY15) with an average length of stay of 2.53days.

Earnings forecast. We are maintaining our FY17F earnings forecasts for now as we expect that KPJ will be able to meet our earnings projections. We are also introducing our FY18F number in this report. The key risks to our earnings are: (i) delay in opening of new hospitals; (ii) longer-than-expected gestation period for new hospitals; (iii) lower-thanexpected inpatient admissions and revenue per patient and; (iv) increasing cost of operations.

Maintain NEUTRAL with a revised Target Price (TP) of RM4.20. After updating our numbers post earnings announcement, we are reiterating our NEUTRAL recommendation on KPJ with a revised SOP-based TP of RM4.20 per share (TG: 3.0%, WACC: 7.84%). Going forward, we anticipate higher contribution from newly opened hospitals as well as improvements in contribution coming from its more matured hospitals. We are encouraged on the fact that KPJ managed to maintain its patient admissions number, which we think stemmed from the gradual recovery in consumer sentiment. Additionally, KPJ has also undertaken a price revision exercise back in October 2016 to cater for the increasing operational costs which we think will assist in its revenue growth in FY17. That said, we remain wary on the current currency environment of a strong USD against MYR which might continue to put pressure on its operating expenses.

Source: MIDF Research - 22 Feb 2017