INVESTMENT HIGHLIGHTS

• 4QFY17 normalised earnings beat expectations at RM61.3m

• Revenue boosted by increase in inpatient admission and complex cases

• Indonesian operation remain challenging

• Headline operating statistics remains intact

• FY18F earnings revised upwards by +8.3%

• Maintain BUY with a revised TP of RM1.12 per share

Exceeded expectations. KPJ Healthcare Bhd’s (KPJ) 4QFY17 normalised earnings came in at RM61.3m. This brings its full-year FY17 normalised earnings to RM162.2m which exceeded ours and consensus expectations, accounting for 108% and 109.3% of ours and consensus full year forecasts respectively. Revenue and earnings increase by +13.3%yoy and 17.9% respectively. Meanwhile, on a quarterly sequential basis, revenue and increased by +16.7% while earnings expanded by +70.4%. A fourth interim dividend of 4.0sen was also declared for the quarter-under-review.

Revenue boosted by increase in inpatients admissions and complex cases. In 4QFY17, KPJ’s increase in revenue was mainly due to the combination of higher contribution from new hospitals as well as increase in inpatient admission and complex cases undertaken during the quarter. The revenue from Malaysian hospitals increased by +11.3%yoy attributable to the increase in revenue generated by its newly opened hospitals such as: KPJ Rawang, KPJ Klang, KPJ Pasir Gudang, KPJ Bandar Maharani and KPJ Pahang. The increase in revenue was also contributed by the increase in inpatient admissions and complex cases undertake as a result of 25 new consultants hired from various specialization.

Indonesian operation remains challenging. KPJ’s Indonesian cumulative operations revenue improved marginally by +1.9%yoy. This is mainly contributed by the lower patients admissions recorded at Rumah Sakit Medika Permata Hijau and also due to the appreciation of Malaysian Ringgit towards the end of the quarter which resulted in a foreign exchange loss.

Operational headline numbers remain intact. In 4QFY17, we note that the number of admissions for inpatient was up by +2.4%yoy whilst outpatient admission was down marginally by -0.4%yoy. Inpatient admission was recorded at 286,465 for the 4QFY17 vs 279,794 in 4QFY16 while occupancy rate for beds declined to 65.2% (vs 66.2% in 4QFY16) with an average length of stay of 2.54days.

Revised FY18 earnings upwards. We are revising our FY18F upwards by +8.3% as we input lower operating expenses due to strengthening and stabilizing Ringgit against USD. 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-than-expected inpatient admissions and revenue per patient and; (iv) increasing cost of operations.

Maintain BUY with a revised Target Price (TP) of RM1.12. Post earnings adjustment, we are reiterating our BUY

recommendation on KPJ with a higher TP of RM1.12 (from RM1.06 previously) per share (TG: 3.0%, WACC: 8.32%). Going forward, we are expecting further improvements in terms of revenue contributions coming from KPJ’s new hospitals as well as its more matured hospitals. Additionally, we opine that the strengthening and stabilising of Ringgit against USD will bode well for the company as it will provide better clarity on KPJ’s operating expenditure. Furthermore, we deem that KPJ is attractive in terms of valuation as it remains undervalued when compared against its regional peers. Despite having 25 hospitals in its network, KPJ continues to trade below regional average at FY18F PER at 22x vs an average of 30-40x for its regional peers with lesser number of hospital under their belt.

Source: MIDF Research - 27 Feb 2018