KPJ Healthcare - Hospital expansion to drive growth

-  We re-iterate our BUY recommendation on KPJ Healthcare (KPJ) with a raised fair value of RM7.35/share from (RM6.15/share previously) based on a smaller 15% discount to our DCF value (vs. 30% previously). KPJ’s long- term earnings growth remains intact, underpinned by a step-up in bed capacities from a fleet of 7 new hospitals in the pipeline.  

-  KPJ posted a higher interim net profit of RM68mil for 1HFY12, up 18% YoY. Annualised, the results were slightly below both our initial forecast and consensus, coming in at 10% and 14% below expectations. The variance was mainly attributable to higher-than-expected cost of sales and administration expenses. 

-  We have thus fine-tuned our earnings forecasts by 7%-8%. We now project a net profit of RM146mil for FY12F, before rising by 16% to RM169mil for FY13F and a higher 22% to RM206mil in the following year. 

-  KPJ recorded a 16% YoY increase in turnover, led mainly by hospital operations in Malaysia which accounted for 91% of group revenue. For 1HFY12, EBITDA margin was weighed down marginally due to higher opex (0.7ppt to 12%). 

-  Nevertheless, this was more than offset by higher contributions from associate Al-‘Aqar Heatlhcare REIT (AQAR Mk Equity, Hold).

-  On a sequential basis, 2Q net profit was up 4% despite a flattish revenue growth. This was largely attributable to improved cost containment efforts which subsequently led to a small EBIT margin expansion.     

-  Whilst domestic hospital operations staged an encouraging performance (segmental PBT: +75% QoQ), its Indonesian-arm remained in the red with a RM2.4mil segmental loss vs. 1QFY12’s -RM1.7mil. Nonetheless, we expect things to turn around by year-end on back of rising patient numbers at its hospitals in Indonesia.  

-  Even though the share price has performed well since our initiation back in April 2012, the stock’s valuation at fullydiluted PER of 24x FY13F revised earnings is still attractive. Current valuation is at par to peers in Thailand, but at a huge 30% discount to recently-listed IHH Healthcare’s PER of 34x.    

Source: AmeSecurities