INVESTMENT HIGHLIGHTS

• 9MFY18 earnings below our expectations at RM41.7m

• Cost optimisation initiatives by new hospitals lifted earnings

• Indonesian segment loss expanded

• Nonetheless, headline operating statistics remains steady

• Maintain NEUTRAL with a revised TP of RM1.11

9MFY18 earnings grew by +21.3%yoy. KPJ Healthcare Bhd’s (KPJ) 3QFY18 earnings came in at RM41.7m (+34.9%yoy). This brings its 9MFY18 earnings to RM126.5m (+21.3%yoy) which is below ours but wihtin consensus expectations, accounting for 65.0% and 73.1% of ours and consensus full year forecasts respectively. Nonetheless, we are expecting stronger 4QFY18 earnings as historically it accounted for 30% of full year earnings.

Earnings lifted by cost optimisation initiatives. 9MFY18 revenue generated from the Malaysian operation improved by +4.6%yoy contributed by the: (i) increase in number of patient visit, number of beds and complex cases per patient, particularly for KPJ Rawang, KPJ Bandar Maharani and KPJ Pasir Gudang and; (ii) aggressive promotions to increase medical tourism. Nevertheless, the solid improvement in earnings was further boosted by the cost optimisation initiatives.

Loss from Indonesian segment expanded. 9MFY18 revenue from the Indonesian segment declined by -54.2%yoy which resulted in net loss of RM2.9m. This was mainly contributed by the lower patients’ admissions recorded at Rumah Sakit Medika Bumi Serpong Damai (inpatient: -29.3%yoy, outpatients: -11.1%yoy). The lower number of patient was caused by the stricter regulations imposed by the government over cases and treatment on patients under BPJS scheme, an Indonesian National Health Insurance System.

The group operational statistics remain steady. For the 9MFY18, we note that the number of admissions for inpatient for the group was up by +2.6%yoy whilst outpatient admission increased by +1.5%yoy. Nonetheless, occupancy rate for beds was marginally down by -1.0% to 65.0%. This is due to the aforementioned dropped in number of patients’ admissions at Rumah Sakit Medika Bumi Serpong Damai. Nonetheless, we expect that the growth of inpatient admission for Malaysia segment (inpatient: +1.8%yoy) will partially mitigate the weakness of the Indonesian operation.

Third interim dividend declared. Third interim dividend of 0.5sen per share was declared in Q3FY18 (vs Q3FY18:0.38sen). This brings the total dividend declared to-date to 1.5sen per share.

Impact to earnings. We are revising our FY18F and FY19F forecast downwards by -5.1% and -5.3% as we input: (i) a higher assumption of operating cost as the group will have to support the government with its initiative to provide the B40 group with more healthcare coverage as announced in the recent Budget 2019 and; (ii) a longer expection of recovery for Indonesian operation.

Target price. We are revising our target price of RM1.11 per share (previously RM1.16). Our target price is derived from DCF valuation with terminal growth of 3.0% and WACC of 8.32%.

Maintain NEUTRAL. 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. The opening of KPJ Bandar Dato’ Onn in 3QFY18 would further accelerate the revenue growth rate for the year. However, we expect the Indonesian operations to remain lossmaking in the foreseeable term mainly due to lack of contract doctors. All factors considered, we are maintaining our

NEUTRAL recommendation. The key risks to our call recommendation 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.

Source: MIDF Research - 30 Nov 2018