KPJ Healthcare Bhd 
(Aug 28, RM4.20) 
Maintain underperform with a higher target price (TP) of RM3.74: First half ended June 30 of financial year 2015 (1HFY15) profit after tax and minority interests (Patami) of RM69.9 million (+9.3% year-on-year, y-o-y) came in above our expectations at 56% of our forecast. 

However, the results came in within market consensus’ expectation at 48%. The positive variance from our forecast was due to higher-than-expected performance in its Malaysian operations. A second interim single-tier dividend per share (DPS) of 1.75 sen was declared which brings 1HFY15 DPS to 3.5 sen. 

Quarter-on-quarter (q-o-q), the second quarter ended June 30, 2015 (2QFY15) reported Patami rose 6% to RM36 million largely anchored by the Malaysian segment, which offset losses from aged care and support services and a 2.4% increase in inpatient admission. Y-o-y, 1HFY15 net profit rose 9.3% due to higher earnings contribution from Malaysia (+6%), underpinned by reduced losses from new hospitals namely KPJ Rawang and KPJ Bandar Baru Klang Specialist Hospital, and lower losses from aged care services. We understand that losses narrowed in 1HFY15 to between RM14 million and RM15 million compared with RM20 million to RM21 million in 1HFY14. Its Indonesian operations broke even. Earnings growth is expected to be pedestrian over the next few quarters. In Indonesia, we expect losses in Rumah Sakit Bumi Serpong Damai to persist over the next several quarters due to difficulty in attracting doctors leading to lower bed utilisation of 40%. However, this is expected to be buffered by the profitable Rumah Sakit Medika Permata Hijau. 

Looking further into FY15, KPJ is targeting to open KPJ Perlis and KPJ Pahang Specialist. Additionally, KPJ is incurring higher staff costs due to the gradual opening of more beds since it needs to maintain a certain required ratio of staff per hospital, and KPJ employing more staff in its headquarters to support ongoing projects. We are raising our FY15E (estimate) and FY16E earnings by 5.5% and 5.7%, respectively, due to the better-than-expected results. 

We maintain an “underperform” rating. However, the TP is raised from RM3.54 based on unchanged 27 times FY16 earnings per share.  — Kenanga Research, Aug 28

This article first appeared in digitaledge Daily, on September 1, 2015.