INVESTMENT HIGHLIGHTS

• 1QFY19 earnings came in at RM40.3m (-4.5%yoy), lagged our expectation

• While patient volume declined, revenue rose by +5.5%yoy driven by higher average revenue per inpatient admission

• 1QFY19 profit before tax eased by -4.3%yoy resulting from MFRS 16 adoption

• Maintain NEUTRAL with a revised TP of RM0.98

1QFY19 earnings dropped by -4.5%yoy. KPJ Healthcare Bhd’s (KPJ) 1QFY19 earnings dropped by -4.5%yoy to RM40.3m. Nonetheless, this lagged ours but met consensus expectations, accounting for 19.7% and 21.2% of ours and consensus full year FY19 forecasts respectively. While 1QFY19 revenue rose by +5.5%yoy to RM868.1m, this was partially dragged by the negative impact from the adoption of MFRS 16.

Rawang, Pasir Gudang and Johor achieved better profitability. The group earnings continues to be supported by the Malaysian operation where profit before tax (PBT) improved by +9.1%yoy to RM69.6m. This is driven by the higher profitability achieved particularly for KPJ Rawang, KPJ Pasir Gudang and KPJ Johor as a result of increase in number of patient visit, number of beds and complex cases. Note that KPJ Rawang, which was launched in 2014, turn profitable in FY18.

Commendable increase in average revenue per inpatient. For 1QFY19, we note that the number of admissions for outpatient and inpatient for Malaysian hospital had dropped marginally by -0.4%yoy and -1.0%yoy respectively as the competition in the private healthcare space intensified. However, the dropped in number of patient was made up by the commendable increase in average revenue per inpatient by +9.7%yoy to RM7,881 per inpatient, presumably due to the higher number of complex cases.

The adoption of MFRS 16 partially depressed 1QFY19 earnings. The adoption of MFRS 16 requires the group to reflect majority of the Group’s hospitals that are leased from Al-‘Aqar Healthcare REIT in its balance sheet starting from 1 January 2019. As a result, right-of-use assets and total liabilities recognised amounted to RM792.0m and RM1,073.0m respectively. In the 1QFY19, the depreciation charges and interest expense to amortise these assets and liabilities amounted to RM26.1m. As this amount is higher than the quarterly lease expense charged pre-MFRS 16 of RM23.0m, KPJ’s profit before tax for the 1QFY19 profit before tax was partially depressed by -4.3%yoy.

Source: MIDF Research - 3 Jun 2019