This article first appeared in The Edge Financial Daily on May 23, 2019
KPJ Healthcare Bhd
(May 21, 93.5 sen)
Downgrade to hold with a lower target price (TP) of RM1: While KPJ finally charted a strong recovery in inpatient volume growth in 2018, we think that the recovery could be short-lived, as we have seen weakness in the consumer sentiment index, and there is a high correlation between KPJ’s inpatient volume growth and the index movements. Moreover, despite recording stronger operational statistics and higher revenue, 2018 core earnings declined 2% year-on-year on higher tax and depreciation, as its expansion resumed.
Hence we are also cautious on potential start-up losses from the greenfield expansion which may dilute its near-term earnings.
KPJ’s Indonesia operations, which fell into the red since the fourth quarter of financial year 2017 as a result of the new national healthcare policies, reported narrowed pre-tax losses and positive earnings before interest, taxes, depreciation and amortisation (Ebitda) in 2018.
With the ongoing realignment of the business mix to enhance service offerings targeting more private patients, KPJ aims to achieve profit before tax turnaround for its Indonesia operations by end-2019.
In addition, the disposal of its 57%-owned aged-care business in Australia, which was postponed due to the royal commission of inquiry and the soft property market, is now targeted to be completed by the second half of 2019.
We cut our 2019-2021 earnings for KPJ by 7%-13%, mainly to account for i) the adoption of the new accounting standard, MFRS16, ii) lower inpatient volume growth due to weaker consumer sentiment, and iii) start-up costs from new hospital expansion.
While the stock is currently trading at two standard deviation below its five-year price earnings and earnings value/Ebitda means, we believe valuation is fair at current levels in light of the risk of a potential derating of the stock on weakening consumer sentiment. — Affin Hwang Capital Research, May 21