KPJ Healthcare - Imminent Re-rating

On the annualized basis, KPJ’s 1HFY12 results came in below our and consensus expectations, with the 1HFY12 net profit accounting for about 45% of our and consensus FY12 forecasts due to the weaker-than-expected 2QFY12 numbers. We have revised down our FY12 and FY13 earnings by 2.2% and 4.2% respectively.  However we are raising our PE multiple from 25.1x to 28x and rolling over our EPS from FY12 to FY13, in line with the regional sector PE rerating especially after the listing of IHH, which gives a higher FV of RM7.15 from RM6.00. With the sizeable upside, we are upgrading our call on KPJ from NEUTRAL to BUY.

Below expectations. In the 1HFY12, KPJ recorded a net profit of RM68.1m, which accounted for about 45% of our and consensus FY12 net profit forecasts. While the 2H is generally stronger, we view the results as slightly below our expectation due to the weaker-than-expected 2QFY12 results attributed to the two-week closure of the operating theaters (OT) in its flagship hospitals, such as Damansara Specialist, Ampang Specialist and Johor Specialist, for major upgrading and maintenance works. We gather that due the closure, those hospitals recorded only 2% y-o-y revenue growth for 2QFY12, as compared to the low to mid-teen y-o-y growth generally. Overall, the 2QFY12 revenue for the group was relatively unchanged q-o-q despite the fact that the 1Q is a seasonally weaker quarter.

Decent y-o-y growth. Revenue for 1HFY12 was up by 16.1% y-o-y, driven by the higher activities at its hospitals coupled with contribution from its aged care facilities business, following the completion of the acquisition of Jeta Gardens in late-Nov 2011. In line with the higher revenue, net profit was up by 18.1% y-o-y, further supported by the higher associate contribution from Al-Aqar REIT. Its hospital in Indonesia has recorded strong progress, with 173% y-o-y revenue growth while LBT narrowed by 6.9% y-o-y for 1HFY12 as it continue to expand its patient base. Meanwhile Jeta Gardens recorded revenue of RM13.2m with LBT of RM3.7m. EBIT margin was lower y-o-y at 8.9% in 1HFY12 as compared to 9.2% in 1HFY11, partly attributed to the loss from Jeta Gardens coupled with startup costs for the opening of Klang Specialist in mid-May.

Upgrade to BUY. We have revised down our FY12 and FY13 earnings by 2.2% and 4.2% respectively. Following the regional sector upward PE rerating especially after the listing of IHH, we are raising our PE multiple valuation on KPJ from 25.1x to 28x (market cap-weighted average for the regional sector PE) and rolling over our EPS from FY12 to FY13 in line with our regional valuation. Subsequently, we have raised our FV to RM7.15 to RM6.00. With the sizeable upside, we are upgrading our recommendation on the stock from Neutral to BUY. We reiterate our view that KPJ is an excellent choice for long term investment as it offers a growth story in a defensive sector.

Source: OSK