KEY INVESTMENT HIGHLIGHTS

• 4QFY19 earnings came in at RM84.0m (+57.5%yoy), leading to FY19 earnings of RM211.4m

• This exceeds our and consensus’ expectation

• Profit before tax was partially depressed by -5.7% due to the impact of adoption of MFRS 16

• However, earnings was significantly lifted by the recognition of investment tax allowance

• First interim dividend declared of 0.5sen per share for FY20

• Maintain NEUTRAL with a revised TP of RM0.93

Earnings lifted by the recognition of tax incentives. KPJ Healthcare Bhd’s (KPJ) 4QFY19 earnings came in at RM84.0m (+57.5%yoy). This brings its cumulative full year FY19 earnings to RM211.4m (+17.8%yoy) which was above ours and consensus expectations, accounting for 117.8% and 114.3% of full year FY19 forecasts respectively. The group’s earnings were significantly lifted in 4QFY19 due to the recognition of investment tax allowance, which the group had obtained from the authority during the period. This resulted in an increase in deferred tax asset by +59.4% to RM109.1m.

Commendable performance by the Malaysian operation. The group earnings continued to be supported by the Malaysian operation whereby 4QFY19 revenue and PBT improved by +7.7%yoy and +11.0%yoy respectively. This was driven by the: (i) increase in inpatient revenue intensity by +7.1%yoy resulting from increased in surgeries performed; (ii) the opening of new block in KPJ Seremban which resulted in increased number of beds. However, KPJ’s overall PBT was partially depressed by -5.7% due to the impact of adoption of MFRS 16 which require the group to eliminate rental expenses in profit and loss and replaced by depreciation and finance costs.

First interim dividend declared. The first interim dividend of 0.5sen per share was declared for FY20.

Impact to earnings. We are revising our FY20F and FY21F forecast downwards by -1.6% and –0.4% as we take into account a slightly higher effective tax rate going forward.

Target price. Post earnings announcement, we are revising our target price of RM0.93 per share (previously RM0.94). Our target price is derived from DCF valuation with terminal growth of 3.0% and WACC of 8.3%.

Source: MIDF Research - 27 Feb 2020