INVESTMENT HIGHLIGHTS

• 1Q17 earnings within expectations

• Revenue boosted by increased contribution from Malaysian hospitals by +6.1%yoy

• Overseas operating performance remains lackluster

• Operational headline numbers remain intact

• FY17F earnings maintained

• Maintain NEUTRAL with revised TP of RM4.30 per share

Within expectations. KPJ’s 1QFY17 earnings came in at RM38.3m which is within our and consensus expectations, accounting for 22.6% and 25.7% of full year earnings forecasts respectively. Revenue and earnings increased year-over-year by +6.7% and +12.0% respectively. On a quarterly sequential basis, KPJ’s revenue also increased by +6.6% while earnings recorded an improvement of +5.5%. In addition, a first interim dividend of 1.8sen was also declared for the quarter.

Revenue boosted by Malaysian hospitals. In 1QFY17, KPJ’s increase in revenue was mainly due to the combination of organic growth from existing hospitals as well as the increasing revenue from newly opened hospitals across all markets. The revenue from Malaysian hospitals increased by +6.1% year-over-year attributable to the increase in revenue generated by its newly opened hospital KPJ Pahang. The increase in revenue is also contributed by existing hospitals which have improved last financial year.

Overseas operations remain lackluster. KPJ’s Indonesian operations revenue recorded a marginal decrease by -3.5%yoy. However, PBT climbed by +61.5%yoy mainly attributable to the increase in number of patients at both hospitals. Its Australian aged care service also reported an encouraging revenue growth of +35.2%yoy 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. Meanwhile, on the PBT basis, it remains loss making due to higher operating expenses incurred.

Operational headline numbers remain intact. In 1QFY17, we note that the number of admissions for both inpatient and outpatient was down marginally by -1.2%yoy and -2.1%yoy respectively due to persistent soft consumer sentiment. Inpatient admission was recorded at 72,735 for the 1QFY17 vs 73,602 in 1QFY16 while occupancy rate for beds declined to 68.3% (vs 71.5% in 1QFY16) with an average length of stay of 2.53days.

Earnings forecast. We are maintaining our FY17-18F earnings forecasts for now as we expect that KPJ will be able to meet our earnings projections. The key risks to our earnings are: (i), delay in opening of new hospitals, (ii) longer-thanexpected gestation period for new hospitals, (iii) lower-than-expected inpatient admissions and revenue per patient and, (iv) increasing cost of operations.

Maintain NEUTRAL with a revised Target Price (TP) of RM4.30. Post earnings announcement, we are reiterating our NEUTRAL recommendation on KPJ with a revised SOP-based TP of RM4.30 per share (TG: 3.0%, WACC: 8.32%) after we roll forward our base valuation year to FY18. 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 inpatient admissions number as well as increased its revenue contribution from the Malaysian hospitals which we think stemmed from the gradual recovery in consumer sentiment. Additionally, we are also seeing the results of a price revision exercise undertaken 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 their operating expenses.

Source: MIDF Research - 29 May 2017