KPJ Healthcare Berhad Moving on cautiously into FY16

14 January 2016 Corporate Update KPJ Healthcare Berhad Moving on cautiously into FY16 INVESTMENT HIGHLIGHTS Cautious outlook for FY16 Expansion plan to resume Overseas operation to remain subdued in FY16 4Q15 earnings likely to be around RM40-46m Maintain NEUTRAL with a revised SOP-based TP of RM4.75 Cautious outlook for FY16. We met with KPJ s management recently to get some insights on its direction for FY16. Management indicated that its outlook has turned cautious due to concern on the possibility of rising cost of drugs and medical supplies. This is in view of the weakening Ringgit against the greenback that might persist during the year. Despite being able to pass on the costs to its patients, the current cost-sensitive consumer environment may lead to difficulty in raising prices without affecting the demand for both inpatient and outpatient private medical services. However, any increase in cost would only be visible should Ringgit weakens to RM4.50 per US Dollar and this will be reflected in 2H16 as it renews its yearly contract with suppliers. That said, KPJ is still projecting a 15%yoy growth in revenue for FY16 while maintaining its PAT margin target of 5-6%. We think this is achievable premised on the expected opening of two new hospitals as well as the recovery in consumer sentiment later this year. Expansion plan to resume. Management disclosed that both KPJ Pahang and KPJ Perlis are on track for opening in 1Q16 and 3Q16 respectively. Recall that the openings for these two hospitals were delayed by a year due to issues with the building contractors. Following the opening of KPJ Pahang, Kuantan Specialist Hospital will cease operation and it might be turned into a self-sustaining outpatient medical centre in the future. Meanwhile, for its existing hospitals which are undergoing renovations, management is expecting to complete about 72 clinics and 163 beds during the year. Overseas operation to remain subdued. On its overseas operations, we think that it will continue to remain subdued for the year due to specific conditions in the local markets. For Indonesia, despite managing to turn profitable in FY15, it continues to operate in a challenging environment. RS Permata Hijau experienced a YTD drop in patient admissions (-8.4%yoy) following the resignation of one of its reputable doctors while RS Bumi Serpong Damai continues to struggle in attracting patients to the hospital due to its location and reputation. Maintain NEUTRAL Revised Target Price (TP): RM4.75 (previously RM4.27) RETURN STATS Price (13 January 16) Target Price RM4.36 RM4.75 Expected Share Price Return +8.9% Expected Dividend Yield +1.6% Expected Total Return +10.5% STOCK INFO KLCI 1,642.54 Bursa / Bloomberg Board / Sector Syariah Compliant 5878 / KPJ MK Main / Trading Services YES Issued shares (mil) 1,038.97 Par Value (RM) 1.00 Market cap. (RM m) 4,529.92 Price over NA 3.25 52-wk price Range RM3.60-RM4.42 Beta (against KLCI) 0.64 3-mth Avg Daily Vol 1.16m 3-mth Avg Daily Value Major Shareholders (%) RM4.96m Johor Corp 44.64 EPF 11.86 Waqaf An-Nur Corporation 7.33 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures

Meanwhile for Jeta Gardens, despite having added 72 new beds, it has yet to reach full occupancy at 77% (from 98% in 9M14). This was largely due to patients waiting for their clearance from Australia s welfare department to partly fund the cost for the senior living care, which can be up to 75% of the total cost. This created a revenue-rental mismatch which dragged its earnings down. We think that the earnings contribution will continue to be minimal, at <10% in FY16 for its overseas operations and will only fully turn around in FY17. As of 9M15, Indonesia and Australia contributed about 6% to its total revenue. 4Q15 earnings likely to be around RM40-46m. KPJ is set to announce its 4Q15 results tentatively on the 25 th of February 2016. We are estimating that KPJ will register about RM40-46m in net profit for the 4Q of 2015. This is due to the fact that 4Q is traditionally a stronger quarter for hospital operators, which is mainly attributable to the holiday season starting from November to December. Additionally, we think this is possible given that it has recorded RM40m in net profit for 3Q15 and RM46m in 4Q14. As of 9M15, KPJ managed to record a net profit of RM115.5m, an increase by 11.2%yoy. As such, we expect KPJ to be able to maintain its GP, PBT and PAT margins at 30%, 8% and 5-6% respectively. Earnings revision. We are revising our FY15F and FY16F earnings estimates upwards by +16.4% and +16.9% respectively. These upward revisions are to reflect the changes made in occupancy rate for beds to 68% from 65% as well as the changes in its hospital opening pipeline. Furthermore, for FY16 we are expecting the growth to arise from the additional capacity coming from KPJ Pahang and KPJ Perlis. Key risks to our earnings would most likely be: i) continued soft consumer sentiment, ii) delay in the openings of KPJ Pahang and KPJ Perlis, and iii) persistent weakening of RM vs USD. Maintain NEUTRAL with a revised Target Price (TP) of RM4.75. Post earnings revision, we are maintaining our NEUTRAL recommendation on KPJ with a revised SOP TP of RM4.75 per share (from RM4.27 previously). While we like KPJ for its long term growth prospects, capital appreciation and capacity expansion plan, we think all the positives have been priced in at this juncture. We opine that key re-rating catalysts for KPJ will be: i) faster gestation periods for newly opened hospitals (from the current 3-5 years), ii) better contribution from overseas operation, and iii) improvement in margins. Table 1: KPJ Healthcare s capacity expansion plan (Greenfield) Project Location Total Capacity (beds) First Phase (beds) Completion Opening Tanjung Lumpur Pahang 190 120 4Q2015 1Q2016 Perlis Perlis 90 60 2Q2016 3Q2016 Kuching Sarawak 150 130 1Q2017 2Q2017 Miri Sarawak 100 60 3Q2017 4Q2017 Bandar Dato' Onn Johor 150 90 4Q2017 1Q2018 UTM Johor 150 60 4Q2017 1Q2018 Melaka Melaka 90 60 2Q2018 3Q2018 Port Dickson Negeri Sembilan 90 60 4Q2018 1Q2019 Bayuemas, Klang Selangor 180 110 4Q2018 1Q2019 Table 2: KPJ Healthcare s capacity expansion plan (Brownfield) Hospitals Description Capacity Expected Completion KPJ Selangor Clinics 54 1Q2016 KPJ Seremban Beds 80 1Q2016 KPJ Penang Beds 156 3Q2016 KPJ Ampang Beds 150 Clinics 33 1Q2017 KPJ Puteri Beds 220 4Q2016 Sri Manjung Beds 30 3Q2016 KPJ Johor Beds 53 3Q2016 Taiping Clinics 18 3Q2016 2

Chart 1: KPJ Healthcare s inpatient admission Chart 2: KPJ Healthcare s outpatient admission Table 3: KPJ Healthcare s SOP valuation Items RM'm Remarks KPJ Enterprise value 5,047.3 DCF method, WACC: 8.3%, TG: 3% Net debt FY15 (1,055.6) KPJ firm value 3,991.7 KPJ Al-Aqar Healthcare REIT 584.9 Based on KPJ's 48.7% stake and consensus TP of RM1.65 Total KPJ firm value 4,576.6 Proceeds from warrants 355.8 Cash proceeds from rights and warrants 4,932.4 No. of shares (m) 1,039.0 KPJ value per share 4.75 Source: Bloomberg, Company, MIDFR INVESTMENT STATISTICS FYE Dec (RMm) FY2012 FY2013 FY2014 FY2015F FY2016F Revenue 2,096.1 2,332.0 2,641.0 2,874.2 3,260.7 EBIT 140.0 138.0 211.0 237.8 263.6 Associate 55.0 47.0 42.0 43.0 45.5 Net earnings 144.0 103.0 140.0 154.8 170.4 Core earnings 125.0 100.0 126.0 154.8 170.4 Core EPS (sen) 19.1 10.6 13.6 15.0 16.5 Core earnings growth (%) (10.5) (48.5) 28.3 10.3 10.0 PER (x) 22.9 41.3 32.2 29.0 26.4 Net DPS (sen) 11.5 6.0 6.5 7.5 8.3 Net dividend yield (%) 2.6 1.4 1.5 1.7 1.9 Source: Company, Forecasts by MIDFR 3

DAILY PRICE CHART Syed Muhammed Kifni Noor Athila Mohd Razali noor.athila@midf.com.my 03-2772 1679 4

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. SELL TRADING SELL Total return is expected to be <15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 5