INVESTMENT HIGHLIGHTS

• 1QFY18 earnings met expectations at RM42.2m

• Revenue boosted by increase in inpatient admission and complex cases

• Low patient admissions reduced Indonesian revenue contribution

• Headline operating statistics remains stable

• FY18-19F earnings maintained

• Maintain BUY with a revised TP of RM1.16 per share

Met expectations. KPJ Healthcare Bhd’s (KPJ) 1QFY18 earnings came in at RM42.2m which met ours and consensus expectations, accounting for 23% and 25.2% of ours and consensus full year forecasts respectively. Revenue and earnings increase by +5.6% and 5.4%yoy respectively while, on a quarterly sequential basis, revenue was flat at - 1.3% while earnings dipped by -33%. A first interim dividend of 5sen was also declared for the quarter-under-review.

Revenue boosted by increase in inpatients admissions and complex cases. In 1QFY18, 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, particularly for KPJ Rawang, with its number of beds increased by +45%yoy to 128 beds. Other hospitals that registered a double digit growth in number of inpatients include: KPJ Tawakkal, KPJ Klang, KPJ Pasir Gudang and KPJ Bandar Maharani, which translated to higher revenue for the quarter.

Low patient admissions reduced Indonesian revenue contribution. KPJ’s Indonesian cumulative operations revenue and PBT during the quarter declined by -18.6% and -172.3% respectively. This is mainly contributed by the lower patients admissions recorded at Rumah Sakit Medika Bumi Serpong Damai (inpatient: -4.2%yoy, outpatients: -11.9%yoy) and also due to the appreciation of Malaysian Ringgit towards the end of the quarter which resulted in a foreign exchange loss.

Headline operational statistics remain stable. In 1QFY18, we note that the number of admissions for inpatient for Malaysia was up by +5.2%yoy whilst outpatient admission increased marginally by +4.1%yoy. Meanwhile, revenue growth per inpatient and per outpatient for Malaysia was flat at +0.4% and +1.5% respectively. Additionally, occupancy rate for beds was also flat at 69% (vs 68% in 1QFY17) with an average length of stay of 2.5 days. For Indonesia, the number of inpatients and outpatients for Rumah Sakit Permata Hijau (RSPH) increased by +3.9% and +11.6% respectively whilst for Rumah Sakit Bumi Serpong Damai (RSBSD), the number of inpatients and outpatients declined by -27.8% and -4.2% respectively. In terms of revenue per inpatient and outpatient, the Indonesian hospitals recorded - 18.8% and -10% respectively.

FY18-19F earnings maintained. We are maintaining our earnings forecasts at this juncture as we believe that KPJ is on track to meet our earnings projections. 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) increase in operations cost.

Maintain BUY with a revised Target Price (TP) of RM1.16. Post earnings announcement, we are reiterating our

BUY recommendation on KPJ with a revised TP of RM1.16 (from RM1.12 previously) per share (TG: 3.0%, WACC: 8.32%) as we roll forward our valuation base year to FY19. 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 are expecting KPJ Perlis which was opened on 17th May 2018 and KPJ Bandar Dato’ Onn which is expected to be opened in 3QFY18 to further drive the revenue growth for the year. 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 - 31 May 2018