KPJ (5878) : KPJ Healthcare - Hale and hearty in 3Q

Target RM4.10 (Stock Rating: HOLD)

KPJ’s 9M14 core net profit was above expectations as it made up 79% of our full-year forecast and 74% of the consensus number. The company declared a DPS of 2 sen, as expected. We expect a stronger 4Q on seasonal factors. Also, the impending implementation of GST in Apr next year should boost the demand for healthcare services over the next two quarters. We raise FY14-15 EPS by 4-10% to account for the strong YTD performance and delay in its flagship hospital project in Iskandar. This raises our SOP-based target price to RM4.10. However, the stock remains a Hold due to an unexciting earnings outlook. We prefer Pharmaniaga for exposure to the healthcare sector.
      
Key results highlights
KPJ’s 3Q14 core net profit rose 61% yoy to RM29m. The strong yoy improvement was mainly due to the better performance of its Malaysian operations. Net profit of its hospitals in Malaysia rose 44% to RM53m on the back of higher revenue and profit margins. Its hospitals in Indonesia also showed improved results, albeit still in the red, as losses narrowed by 70% yoy to RM1m. However, its aged care facility in Australia continues to face challenges as its net loss widened to RM1.8m, from RM1.6m last year.

Expect next two quarters to be stronger
We expect 4Q to be stronger due to seasonality. On top of that, the impending implementation of GST next year should boost demand for healthcare services in the next two quarters. It is widely expected that GST will result in higher private healthcare costs. We also gather that KPJ has postponed the opening of its flagship hospital in Bandar Dato’ Onn of Iskandar to 2Q16 from 4Q15 due to challenges in raising financing. This is positive for its earnings in 2015 as it will delay the recognition of start-up expenses of the new hospital.

Start-up losses dragged earnings lower
However, KPJ’s net profits in FY14-16 should still be lower than its FY12 high of RM140m due to new hospitals’ losses. Five of its 25 hospitals in Malaysia are still not profitable. Besides, GST will hurt purchasing power and could dissuade patients from switching to private hospitals from heavily-subsidised public hospitals. KPJ’s new hospitals in less affluent locations may find it harder to attract patients. We would turn more positive on the group if its new hospitals turn profitable earlier than expected.

Source: CIMB Daybreak - 26 November 2014