KPJ’s 1QFY13 core earnings of MYR25.1m fell short of both consensus and our expectations, attributed to initial start-up costs incurred at its new hospitals. Following a coverage reallocation, we are trimming our forecasts by 17.7% for FY13F and 9.2% for FY14F while at the same time introducing our FY15F estimates. Maintain BUY, with our FV revised higher to MYR7.30 as we roll forward our valuation to FY14F, based on an unchanged 26x P/E.

A short-term blip. KPJ’s 1QFY13 revenue stood at MYR545.1m (+3.7% y-o-y; +3.5% q-o-q) as contribution from its core Malaysia, Indonesia, and Australia operations rose. Its core earnings, however, declined to MYR25.1m (-24.7% y-o-y; -9.0% q-o-q) as profit margins thinned due to higher operating expenses as well as escalating financing costs. We attribute these to the start-up costs incurred in relation to some of KPJ’s new hospitals as it rolls out an aggressive expansion plan. Meanwhile, the company declared a first interim DPS of 2.0 sen, which implies a payout ratio of over 50% for the quarter.

Revising our earnings forecasts. Following a coverage revamp, we revisited and revamped our earnings model. In view of the opening of some new hospitals this year such as the Sabah, Pasir Gudang, Maharani and Rawang specialist hospitals, we are taking a more conservative stance on our FY13F and FY14F estimates as we foresee the group bearing some gestation costs along the way. Hence, we are trimming our forecasts by 17.7% for FY13F and 9.2% for FY14F. We also take this opportunity to introduce our FY15F core earnings estimate of MYR206.6m.

Maintain BUY. All said, we maintain our BUY call on the company as we continue to like its solid long term fundamentals. Moreover, KPJ is still trading at a 10%-15% discount to its regional healthcare peers. We expect this valuation gap to narrow going forward as the group focuses on enlarging its presence in Malaysia as well as to expand its healthcare tourism segment. Rolling forward our valuation to FY14F based on an unchanged P/E of 26x, we derive a new FV of MYR7.30, compared with MYR7.14 previously.

Source: RHB