Wednesday, January 13, 2010

Research Analysis On KPJ Healthcare

I think I have written enough on KPJ. It looks like the stock and warrants will only be back trading on 15th or 18th January. I expect KPJ to be still under the radar as there are whispers that the company could be planning a significant 10% share placement to a major Singapore health care player soon. Stay tuned.

Affin Securities

Consolidating its presence in Sabah
RM51m cash for a 51% equity stake in a hospital in Sabah KPJ announced that it had entered into the following agreements:
(i) A conditional share sale agreement with Sabah Medical Centre (SMC) for the acquisition of a 51% equity stake in SMC Healthcare Sdn. Bhd. (SMCH) for a cash consideration of RM51m; and
(ii) Management agreement with SMCH for the appointment of KPJ to manage the existing private and the new private hospitals of SMCH.

Under the agreement, the acquisition also includes all SMC’s assets, business and operations, together with a parcel of leasehold land measuring 1.685 ha. This piece of land is located in front of SMCH, and is comparable in size to the latter. It is intended for use for the construction of a new private medical centre. SMCH also agrees to appoint KPJ to manage the existing and new SMC facility for 5 years effective from 1st Jan 2010, subject to renewal. KPJ, in turn, will receive management fees of 3% of SMCH’s monthly gross revenue. The acquisition will be financed from internal funds, and is expected to be completed by 1Q10.

Second hospital in Sabah
SMCH has net assets of RM80m, and hence the acquisition price translates into a P/NA of 1.3x. SMCH will be KPJ’s second hospital in Kota Kinabalu after Damai Specialist Hospital. SMCH is currently the largest hospital among the 3 existing hospitals in KK, with about 100 beds. As the hospital building is currently owned by the state government, SMCH will have to pay rentals while KPJ will manage and own 51% of the business. As for the new hospital to be developed in the adjacent land, SMCH will submit its development plan once the acquisition is completed. KPJ has estimated a RM80m capex for the development cost.

Currently, the existing company that owns the land has a cash of RM40m. Hence, the JV will need to secure about RM40m of borrowings to make up the shortfall.
Maintain BUY; TP adjusted to RM3.00 (suspension until 15th Jan 2010). No change in our earnings projections. The new acquisition is expected to support KPJ’s long-term earnings growth. The stock has been suspended for the completion of a share split, bonus issue and warrants exercise, and will resume trading around 15th – 18th Jan 2010, together with the listing of warrants.

Reference price for the stock has been adjusted to RM2.60, and correspondingly, our price target is adjusted to RM3.00 (FY10 PE target of 15x), based on an enlarged share base but before dilution from warrants. The free warrants are already in the money (exercise price at RM1.70). Maintain BUY.


OSK Securities

Following the sharp price appreciation, some might wonder whether is there any more upside on KPJ’s share price and whether the potential upside been priced in. Although KPJ’s valuation appears to be relatively expensive on a historical basis, we believe there is more upside to the share price as the stock is still trading at a discount to its regional peer average PER of 18.5x. At 18.5x PER on the fully diluted FY10 EPS, we arrive at a TP of RM2.95 and maintain our BUY recommendation. We reiterate our view that KPJ is an excellent choice for long term investment and portfolio balancing in view of its resilient business and steady dividend payout as well growth potential in a defensive sector.

Closing the valuation gap.
Following the strong price appreciation, there has been a significant upward rerating for KPJ’s valuation, which is currently trading at around 16x PER on FY10 EPS. We believe the upward rerating on the valuation is justifiable given that despite the significant price appreciation, KPJ remains a cheaper alternative to its regional peers. We believe the improvement in liquidity, coupled with its position as the only pure private hospital provider listed in Malaysia and the inclusion of KPJ as a member of FBM100 Index, should further justify the higher valuations for the stock Raising its expansion game. Under its previous business expansion strategy, KPJ was aiming to add at least one new hospital each year either through acquisitions or buildinggreenfield hospitals. As its existing hospitals have matured and stabilised, KPJ is ready toembark on a more aggressive expansion strategy by targeting to add at least two new hospitals every year from 2010 onwards, which is in line with its goal to achieve RM2bn revenue by 2012, which we believe is reasonable. Yesterday, KPJ announced its first acquisition for 2010 via the proposed acquisition of a 51% stake in SMC Healthcare SB (SMCH), which owns of Sabah Medical Centre for RM51m.

Maintain BUY. We maintain our forecast but have adjusted our EPS based on an enlarged number of shares following the 1-into-2 share split, 1-for-4 bonus issue and 1-for-4 freewarrants issue. We have imputed an enlarged number of shares from 211.1m previously to659.5m, which takes into account full exercise of the free warrants. We value KPJ at 18.5x PER on FY10 EPS, which is based on its regional peer average, as we believe KPJ deserves a higher valuation as it offers comparable earnings performance as well as future growth potential. At 18.5x PER, we arrive at a TP of RM2.95 and maintain our BUY recommendation. Despite the strong rally leading up to the ex-date of the entitlements, the track record of similar corporate exercises by mid-cap peers is inconclusive and KPJ could well continue its strong rally. KPJ’s should resume trading the latest by next week on completion of the bonus issue and share split exercise.

p/s photos: Janice Man

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