KPJ's 9MFY24 results met our expectation but came in slightly below consensus estimate. Its 9MFY24 core net profit grew 14% YoY on higher inpatient throughput and narrowing losses at its newer hospitals. We keep our forecasts, introduce FY26 numbers and raise our TP by 10% to RM2.33. Reiterate MARKET PERFORM call as we believe positives are already priced in.

Its 9MFY24 core net profit of RM196m (excluding extinguishment of net liabilities related to the disposal of the aged care business by Jeta Gardens) came in at 70% and 66% of our full-year forecast and the full-year consensus estimate, respectively. The result met our expectation but came in slightly below consensus estimate. Typically, 4Q is the strongest quarter judging by past two years performances. It declared an interim dividend of 1.15 sen, bringing 9MFY24 DPS to 3.15 sen which is on track to meet our full-year forecast of 3.35 sen.

YoY, its 9MFY24 revenue rose 15%, thanks to higher inpatient throughput (+8%) and bed capacity (+7%) which drove elective surgeries cases. However, its core net profit rose 14%, thanks to better overhead absorption (on an improved turnover) as well as reduced losses from its new hospitals (which are EBITDA-positive) i.e. KPJ Perlis, KPJ Batu Pahat and KPJ Bandar Dato Onn.

QoQ, its 3QFY24 revenue rose 11% on higher inpatient throughput (+10%) and bed occupancy rate of 72% vs. 66% in 2QFY24 as patients flocked back following the festive season. However, its 3QFY24 core net rose 11%, thanks to better overhead absorption (on an improved turnover) as well as reduced losses from its new hospitals (which are EBITDA-positive) i.e. KPJ Perlis, KPJ Batu Pahat and KPJ Bandar Dato Onn. We believe the solid 3QFY24 net profit was boosted by incremental revenues from higher patient throughput from new hospitals and better operational efficiency from its cost optimisation effort and overhead absorption by adding new beds.

Outlook. It is optimistic that the performance of its five new hospitals will further improve for the rest of FY24 driven by better operational efficiency from its cost optimisation effort including having central procurement and overhead absorption by adding new beds (+7%), which we have factored into our forecasts.

Valuations. We maintain our earnings forecasts, introduce our FY26 numbers and roll forward our valuation base from FY25F to FY26F.

Consequently, we raise our TP by 10% from RM2.11 to RM2.33 based on unchanged 28x FY26F EPS, in line with its regional peers. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see next page).

Investment case. We like KPJ for: (i) the bright prospects of the private healthcare sector in Malaysia underpinned by rising affluence and ageing population, (ii) the low "price elasticity of demand" for healthcare service making players less vulnerable to high inflation as they could pass on the higher cost, and (iii) its strong market position locally with the largest network of 29 private hospitals (vs. only 16 of IHH Healthcare's Malaysia operation in the second place). Reiterate MARKET PERFORM.

Key risks to our call are: (i) regulatory risks, (ii) the lack of political will to roll out a national health insurance scheme, and (iii) longer-than-expected gestation periods for its newer hospitals.

Result Highlight 3Q 2Q Q-o-Q 3Q Y-o-Y 9M 9M Y-o-Y FYE Dec (RM m) FY24 FY24 Chg (%) FY23 Chg (%) FY23 FY24 Chg (%) Turnover 1,032.8 930.6 11.0 906.9 13.9 2,507.2 2,871.4 14.5 EBITDA 240.1 219.2 9.5 220.6 8.8 583.5 609.9 4.5 Dep & Amortisation (71.0) (68.7) 3.4 (70.0) 1.4 (205.4) (207.2) 0.9 EBIT 169.1 150.5 12.3 150.6 12.3 378.1 402.6 6.5 Net Interest expense (43.1) (42.9) 0.5 (51.4) (16.2) (144.0) (130.3) (9.5) Associates 13.6 11.0 23.7 13.8 (1.6) 33.9 34.0 0.2 EI^ 0.0 0.0 0.0 23.3* NM 26.5# 43.4^ 63.8 PBT 139.6 118.6 17.7 136.3 2.4 294.5 349.6 18.7 Tax (43.6) (32.2) 35.5 (35.8) 21.8 (77.1) (107.1) 38.9 MI (9.9) (8.8) 11.9 (8.4) 18.1 (19.7) (27.8) 41.7 PATAMI 86.0 77.6 10.9 92.1 (6.6) 197.8 214.7 8.6 Core Net profit 86.0 77.6 10.9 69.1 24.5 171.3 196.0 14.4 EPS (sen) 2.0 1.8 10.7 2.1 (4.8) 4.5 4.9 8.4 EBITDA margin 23% 24% 24% 24% 21% PBT margin 14% 13% 15% 12% 12% Effective tax rate 31% 27% 26% 26% 31% Source: Company, Kenanga Research, Bursa Malaysia ^ provisional extinguishment of net liabilities related to the disposal of the aged care business in Jeta Gardens *excludes RM23.3m gain from disposal of Indonesia operation #excludes RM26.5m gain from disposal of Indonesia operation Stock ESG Ratings:

Source: Kenanga Research - 26 Nov 2024