KEY INVESTMENT HIGHLIGHTS

• 3QFY19 earnings came in at RM47.7m (+14.4%yoy) which is within our and consensus’ expectations

• Earnings lifted by a commendable performance from local operation

• Facing difficulty in disposing its aged care operation in Australia

• Fourth interim dividend declared of 0.5sen per share

• Maintain NEUTRAL with an unchanged TP of RM0.96

Earnings within expectations. KPJ Healthcare Bhd’s (KPJ) 3QFY19 earnings came in at RM47.7m (+14.4%yoy). This brings its cumulative 9MFY19 earnings to RM131.0m (+3.6%yoy) which met ours and consensus expectations, accounting for 73.0% and 71.3% of full year FY19 forecasts respectively.

Commendable performance by the Malaysian operation. The group earnings continue to be supported by the Malaysian operation whereby 3QFY19 revenue and PBT improved by +7.0%yoy and +12.8%yoy respectively. This is driven by the: (i) increase in inpatient revenue intensity by +3.7%yoy resulting from higher number of radiology cases and surgeries especially for KPJ Johor, KPJ Selangor and KPJ Rawang; (ii) contribution from new hospital i.e. KPJ Batu Pahat (opened in September) and; (iii) cost optimisation and initiatives from existing hospitals. However, KPJ’s PBT was partially depressed by -3.0% due to the impact of adoption of MFRS 16.

Reclassification of Jeta Gardens under continuing operations.

The investment in Jeta Gardens no longer meets the criteria set in MFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” due to the difficulty in disposing this aged care operations in Australia. As of 9MFY19, the segment’s loss amounted to -RM6.4m. Going forward, this amount and future contribution will be reclassified under continuing operations. Hence, we opine that the segment will continue to put a drag on core earnings as there is no sign of turnaround in the near term. Note that Australian private aged healthcare facilities have been adversely affected by the home care packages made available by the Australian Government.

Fourth interim dividend declared. The fourth interim dividend for FY19 was declared of 0.5sen per share. This brings its cumulative dividend to 2.0sen per share (vs FY18: 2.0sen).

Source: MIDF Research - 29 Nov 2019