Thursday, December 17, 2009

Why I Like KPJ Healthcare (A Lot)


Normally, it would take a lot to be convinced of a GLC (kind-of, since its Johor Corp at the helm). KPJ has shifted from a bunch of weak holders to much stronger shareholders. There has also been a significant jump in the strategic thinking of senior management. I would have to say that KPJ ranks right up there in terms of GLCs that are being managed very professionally and adopting global best practices. KPJ’s extensive network now includes 26 private specialist
hospitals consisting of 20 in Malaysia, 3 in Indonesia, 1 in Bangladesh and 2 in Saudi Arabia.



Recent developments:

a) The opening of Tawakal hospital, which was initially scheduled in 4Q09, will be slightly delayed. Construction has already been completed, awaiting CF in Dec 2009 and hospital license thereafter. The hospital will hence only commence its operation in Feb 2010.
b) Indonesia hospital under management was hit by Sumatera earthquake. The hospital in Padang (Rumah Sakit Selasih), owned by Johor Corp, was hit by the recent earthquake in Sumatera.
c) There is still an operating loss from its new Penang Specialist Hospital, which was opened in the middle of this year as it usually takes around 2-3 years for a new hospital to turn profitable.

Regional Mindset - Recently, the Group was appointed by a Vietnamese firm to undertake feasibility studies to set up a private hospital in Vietnam and there is a chance of KPJ being awarded the contract to manage the hospital if the project materialised. Depending on the terms and conditions, the Group might also take up a small stake in the project. The Group is also eyeing opportunities for hospital management in China and Philippines. KPJ should not face any difficulty expanding its hospital management services abroad since foreign partners are satisfied with KPJ‘s good track record in Malaysia supported by the group’s physical resources, financial strength and competent human capital resources in undertaking hospital management challenges.

Preparing To Corner Medical Tourism - KPJ is currently evaluating the proposal for Ampang Puteri Specialist Hospital to apply for international healthcare accreditation from Joint Commission International (JCI) in order to boost its reputation as an international hospital. Accreditation from JCI and several other international organisations has been used as a quality benchmark and selling point by international hospitals in attracting medical tourists. KPJ is also tapping on the lucrative medical tourism market in light of Malaysia fast becoming known as an affordable healthcare hub in Asia. According to the online investment news service NuWire Investor, Malaysia ranks third amongst the world’s top medical tourism destinations, after Panama and Brazil. The number of medical tourism patients has tripled since 2003 to 341,288 patients in 2007, while for the first nine months of 2008, more than 282,000 foreigners sought
medical treatment in Malaysia.

Catalyst #1: Discount Or Premium - This stock is mainly covered by local research houses, which is a pity because its operational performance and strategic execution will entice many foreign funds. Many have their buy recommendations on the stock with a price target of RM6.00. That is based on 12x-13x PE on our FY10 EPS estimate, which is a 30% discount to regional peers’ valuations. Now, why do we need to put a discount on KPJ???????????? Considering its growth potential, its excellent de-gearing exercise, its strategic management to nurture human resource, its careful acquisition strategy, it ability to turn around loss making hospital operations ... and its plans to go regional to leverage its business model... why should it be at a discount, in fact if anything, it should be at a premium. Assuming zero discount, the target price would be fairly valued at RM7.80.

Strong Dividend Yield - As explained during my talk, I like stocks with a good consistent dividend yield. That shows that major shareholders are willing to stick to holding the stock for longer term capital appreciation, and in exchange would still enjoy decent dividend yields so that they need not sell down their shares. Its dividend yield of 7% to 8% is attractive, supported by its resilient business model. According to a recent press report, KPJ’s MD indicated that the company is likely to close a deal with another one or two hospitals. Continuous expansion in hospital network will sustain KPJ’s long term growth.

Catalyst #2: Timing Couldn't Be Better - NOTICE IS HEREBY given that an Extraordinary General Meeting ("EGM") of KPJ Healthcare Berhad ("KPJ" or the "Company") will be held at the Tanjung Puteri 303, Persada Johor International Convention Centre, Jalan Abdullah Ibrahim, 80000 Johor Bahru, Johor, on Monday, 21 December 2009 at 12.30 p.m.

KPJ HEALTHCARE BERHAD ("KPJ" OR "COMPANY") - PROPOSED ACQUISITION BY MAHARANI SPECIALIST HOSPITAL SDN. BHD. (MSHSB), A WHOLLY-OWNED SUBSIDIARY OF KPJ, OF MAHARANI SPECIALIST HOSPITAL BUILDING FROM PROPERTY BASE DEVELOPMENT SDN. BHD. (VENDOR) FOR A CASH CONSIDERATION OF RM22,000,000 (PROPOSED ACQUISITION)
The Board of Directors of KPJ ("Board") wishes to announce that the Company's wholly-owned subsidiary,MSHSB had on 16 December 2009 entered into a conditional Sale and Purchase Agreement ("SPA") with the Vendor for the proposed acquisition of a piece of freehold land on which is erected a partially completed building ("Maharani Specialist Hospital Building") for a cash consideration of RM 22,000,000 ("Purchase Consideration").

Interesting Purchases By Directors - Company director, Datin Paduka Siti Sa'diah Sh Bakir, on 3 December 2009, bought 109,000 shares in KPJ, bringing her stake to 424,100. Company director, Tan Sri Dato' Muhammad Ali Hashim, on 1 December 2009, bought 72,400 shares in KPJ, bringing his stake to 281,800 shares. Company director, Hj Ahamad Bin Mohamad, on 1 December 2009, bought 10,000 KPJ shares, bringing his stake to 57,100. Johor Corp, on 2 December 2009, bought 200,000 shares in KPJ, bringing its stake to 106.223m shares.

Turnaround Record - The Group has maintained its track record by nurturing 3 out of 4 of its “sick” or unprofitable hospitals back to break even this year. Four of KPJ’s hospitals rang up losses in 2007, namely Kuching Specialist Hospital, KPJ Kajang Specialist Hospital, Perdana Specialist Hospital, Kota Bharu and Kota Kinabalu Specialist Hospital. This year the Group had once again proved its mettle in turning around “sick” or unprofitable hospitals to break even this year, except for Kota Kinabalu Specialist Hospital. As a result, we should expect some margins improvement at the Group level. The main reason Kota Kinabalu Specialist Hospital remains in the red is the preference for government hospitals and low health insurance coverage there. However, the hospital is expected to break even in 2009.

Strategic Thinking On Human Resource Management & Supply Chain - KPJ is targeting around 1800 students for its nursing colleges by the end of this year. Over the long term, KPJ aims to have around 8000 students, with a 10% contribution to the Group’s bottomline. Upon the completion of its KPJ Penang Specialist Hospital in Bukit Mertajam by year-end, the existing Bukit Mertajam Hospital will be converted into a nursing college catering to students from the northern region. Although the earnings contribution from nursing education is expected to be relatively small, the colleges provide KPJ with a reliable and consistent supply of professionally-trained nurses. This is a clear advantage for KPJ given that the sector is facing a shortage of doctors and nurses.

Degearing & Clever Usage Of REIT To Unburden Balance Sheet - This can be said to be a smart way of deploying and managing capital. Seriously once a hospital is profitable and has a good business model, it will be able to pay down the rental easily as part and parcel of doing business. That being the case, there is no need to own the building. Using REIT this way forces hospital management to operate on a more transparent costing model, forces more efficiencies in terms of managing its capital and expenses. KPJ has announced the disposal of its remaining building assets into Al-Aqar REIT at a total consideration of RM296.4m, which will be satisfied via the issuance of 123.025m new units in Al-Aqar and a cash consideration of RM179.5m. Apart from unlocking the value of its assets, the disposal will also enable the Group to finance its expansion strategy without straining its balance sheet, particularly its gearing, as around RM157m of the cash proceeds will be used to repay bank borrowings.

REIT's Special Dividend - Although KPJ will have an effective holding of 55% in Al-Aqar REIT upon the completion of the proposed disposals, it will maintain its holding at associate level by actively looking for a strategic investor to take up some of its shareholding in the REIT. Management has indicated that the Group is in the midst of negotiating with several foreign investors with special focus on Middle East investors given the Islamic nature of the REIT - well, considering what happened over there, we can say talks are in limbo. In the event that KPJ is unable to find a suitable partner in 6 months, it will reduce its holding in the REIT to associate level by distributing it as dividend in-specie to its shareholders. Hence, it looks like shareholders could be in for a special dividend in REIT shares soon.


Individual Period Cumulative Period


Current Year Quarter Precending Year Corresponding Quarter Current Year to Date Precending Year Corresponding Period

30/09/2009 30/09/2008 30/09/2009 30/09/2008

RM'000 RM'000 RM'000 RM'000
Revenue 361,487 329,736 1,071,009 944,804
Profit/(Loss) before Tax 37,029 30,087 104,503 90,377
Profit/(Loss) after Tax and Minority Interest 26,807 21,312 73,522 63,189
Net Profit/(Loss) for the Period 29,966 22,686 80,572 67,846
Basic Earnings/(Loss) per Shares(sen) 12.88 10.31 35.40 30.56
Dividend per Share(sen) 10.00 7.00 10.00 7.00



As At the End of Current Quarter As At the Preceding Financial Year End
NTA per Share(RM)

2.8400 2.7700


Catalyst #3: Earnings Visibility - Their year end is 31 December. For the first 3 quarters this year, it has registered a net profit of RM80.57m or a net EPS of 35.4 sen. If you assume the 4Q will be the same as 3Q, then add another 12.88 sen to that = 48.28 sen. Considering that it still has much upside with some loss making hospitals, coupled with two new hospital acquisitions this year, earnings should be much better next year.

Catalyst #4: Corporate Actions - This ties in with the timing thing, the whole shebang should be approved and underway. PROPOSED SHARE SPLIT INVOLVING THE SUBDIVISION OF EVERY EXISTING ONE (1) ORDINARY SHARE OF RM1.00 EACH IN KPJ INTO TWO (2) ORDINARY SHARES OF RM0.50 EACH (SHARES) IN KPJ HELD BY THE ENTITLED SHAREHOLDERS OF THE COMPANY ON AN ENTITLEMENT DATE TO BE DETERMINED AND ANNOUNCED LATER (PROPOSED SHARE SPLIT); PROPOSED BONUS ISSUE OF UP TO 105,525,308 NEW SHARES (BONUS SHARES), TO BE CREDITED AS FULLY-PAID UP BY THE COMPANY, ON THE BASIS OF ONE (1) BONUS SHARE FOR EVERY FOUR (4) SHARES HELD BY THE ENTITLED SHAREHOLDERS OF THE COMPANY AFTER THE PROPOSED SHARE SPLIT ON AN ENTITLEMENT DATE TO BE DETERMINED AND ANNOUNCED LATER (PROPOSED BONUS ISSUE); AND PROPOSED ISSUE OF UP TO 131,906,635 FREE WARRANTS IN KPJ (FREE WARRANTS) ON THE BASIS OF ONE (1) FREE WARRANT FOR EVERY FOUR (4) SHARES HELD BY THE ENTITLED SHAREHOLDERS OF THE COMPANY AFTER THE PROPOSED SHARE SPLIT AND PROPOSED BONUS ISSUE ON AN ENTITLEMENT DATE TO BE DETERMINED AND ANNOUNCED LATER (PROPOSED FREE WARRANTS ISSUE). THE PROPOSED SHARE SPLIT, PROPOSED BONUS ISSUE AND PROPOSED FREE WARRANTS ISSUE SHALL COLLECTIVELY BE REFERRED TO AS PROPOSALS.

So, say you bought 10,000 shares at RM5.60 = RM56,000. After the exercise you will get 20,000 shares plus 5,000 bonus shares (it says after the share split). Plus 5,000 free warrants. Its current paid up is 209.736m shares. Even assuming the share price does not jump, the free warrants itself will give you a tremendous fillip. Better liquidity is a strong plus.

KPJ announced that the exercise price for its free warrants has been fixed at RM1.70. This represents a 15% discount to the theoretical ex-all price based on the 5-day volume weighted average market price. Based on the exercise price of RM1.70, the warrants should trade at RM0.50-0.75 at a minimum.






The above were views on stocks and sectors that I like, not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photo: Sharon Xu

7 comments:

bal marxism said...

wow, thx for u information...
nice post

jatt said...

This is great info.I used to go for KPJ healthcare.Their service is awsome.

http://www.pokjat.com/

x123 said...

after reading your comment
Assume $5.60.
After bonus issue but before warrant $5.60/2.5 = $2.24

after the exercise the KPJ mother share should open at $1.74 (this number is derived from $2.24-$0.50)
or $2.14(this number is derived from $2.24-$0.50/5).
assume KPJ warrant $0.50

x123 said...

sori forgot my question

So after warrant exercise, mother share price should be :
1) $1.74 or
2) $2.14

Salvatore_Dali said...

share split 5.60 = 2.30
then 1 for four bonus plus a similar 1 for 4 warrants, but its free

there should be no dilution in warrants issuance

mother share ex-basis is 2.14

as the warrants exercise px is a lucrative 1.70, the warrant is in the money, which is why the warrant should trade close to 70 sen when listed

x123 said...

I do not understand warrant very well but looks like
no win no loose money to me:

ex buy 2000 share @$5.60 = $11,200
share split 4,000 + 1,000 bonus = 5,000 shares

Mother ex-basis = 5,000 @$2.14 = $10,700
assume Warrant 1000 @$0.50 = $500
Total = $11,200

what does the exercise price of $1.70 means?

Salvatore_Dali said...

hellooo...

all bonuses and split shares are really zero effect ... of course when u do the calculations, u do not lose anything, except you gain on the free warrants.

In reality, share px will move up because of better liquidity n when u have good fundamentals n balance sheet, only then do u do a bonus, plus price affordability comes into play, instead of buying at 6 u now can buy at 2.

Look at KPJ, it is moving now because, as expected, it will move up when they announce the ex-date ... following the approval fm AGM.

So if you follow my drift, you would have gained 7% on share price already. Plus you free warrant:

exercise px 1.70.. means if u buy the warrant u can exercise at anytime till expiry at that price and get 1,000 KPJ shares. So on an ex basis, it prob would be 2.25 now. That is 55 sen in the money, plus a bit of premium, the warrant should trade at 75 80 sen minimum.

and that free warrant adds to yr gains... technically you would have now gained on paper 11% if u bot when i posted a few days back.