Sunday, 31 January 2010

KPJ - Is this a buy, hold or a sell?


This is a company in the medical sector. It has grown the number of hospitals through organic growth and aggressive mergers and acquisitions. Its revenues and earnings grew progressively over the recent years. The private hospitals have benefitted greatly from more people having medical hospitalisation insurance.

P/B 1.90
Cumulative 3 quarters EPS 13 sen (announced on 24.11.2009)
DPS 11 sen

Projected 4 quarters EPS for this year = 13*4/3 = 17.33 sen
Estimated ROE 15.3%

Today's price 2.20
P/E = 12.7
EY =  7.9%
DY = 5%

Historical P/E Range
Last 5-Yr:  6.6 to 10.6
Last 10-Yr:  7.7 to 12.7

Historical DY Range
Last 5-Yr  5.3% - 3.2%
Last 10-Yr  5.1% - 3.1%

At today's market price of $2.20,
  • KPJ is priced at a prospective P/E of 12.7, which is on the high end of its historical 5-Yr and 10-Yr P/E ranges. 
  • Its present price is well supported by its dividend yield of 5.5%, which is in the higher of its historical DY range.  
  • Assuming that its earnings grow at a rate of 10% per year, its PEG = 12.7/10 = 1.27 (fair range: 0.5 to 1.5)
I estimate a signature P/E of 9 or 10 for this stock (fair P/E range: 7 to 12).


Stock Name : KPJ
Date Announced : 14/01/2010

Subject : KPJ - (i) 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 in KPJ ("Share Split")
(ii) Issuance of 131,906,484 free warrants in the Company on the basis of one (1) Free Warrant for every four (4) shares held by the entitled shareholders of the Company after the Share Split and Bonus Issue on the Entitlement Date ("Free Warrants Issue")

Contents : We are pleased to advise that:-

(i) KPJ's entire issued and paid-up share capital comprising 422,101,230 ordinary shares of RM0.50 each after the Share Split will be quoted with effect from 9.00 a.m., Friday, 15 January 2010; and
(ii) KPJ's 131,906,484 free warrants issued pursuant to the Free Warrants Issue will be admitted to the Official List of Bursa Securities and the listing and quotation of these Warrants on the Main Market under the "Loans" sector, will be granted with effect from 9.00 a.m., Friday, 15 January 2010, on a "Ready" basis pursuant to the Rules of Bursa Securities.

The Stock Short Name, ISIN Code and Stock Number of the Warrants are "KPJ-WA", MYL5878WAP16" and "5878WA" respectively.


There are possibly four important conclusions about the local market regarding bonus issues.

1. A large number of bonuses are not made for financial reasons.
2. There is strong evidence for the existence of either insider trading or insider inspired trading prior to bonus announcement.
3. Local investors/speculators do chase after bonuses.
4. There is strong evidence of heavy selling after bonus announcements have been made.

What this means in plain terms is that the typical investor who buys the stocks of a company undergoing bonus issue either just before (by basing his purchase on rumours) or just after the announcement of a bonus almost certainly ends up losing money on a relative basis. That is, had he bought other shares, he certainly would have done better.


Analyst report from OSK
Attachment: KPJA%20Fresh%20Start20100107%20OSK.pdf
(There are some nice graphs in this report on the effect of bonus announcements on the shares of KPJ, UMW and KNM.  Figure 1 depicing the Increase in KPJ’s share price and volume traded post announcement is particularly of interest.)
Improved liquidity. Back in August when KPJ’s 1HFY09 results were released, KPJ’s share price was trading at less than 7x PER on FY10 EPS. As its low share liquidity was among the issues raised by investors leading to the low PER, KPJ subsequently announced proposals for a 1-into-2 share split, 1-for-4 bonus issue and 1-for-4 free warrants issue as a step to improve the liquidity and marketability of thestock. Judging from the significant jump in the average daily volume and value traded post the announcement of the proposals, it appeared that the proposals are highly welcomed by the investors. The improved liquidity and increase in investors’ interest has indirectly supported the upward rerating on the stock price which has appreciated by around 50% since the announcement of the proposals.

Nevertheless, we believe the strong price appreciation is not solely attributed to the excitement over the proposals as there are also strong fundamental reasons for the upward rerating in valuation.

Maintain BUY with fully diluted EPS. We maintain our earnings forecast. However, we have adjusted our EPS based on an enlarged number of shares following the proposals for the 1-into-2 share split, 1-for-4 bonus issue and 1-for-4 free warrants issue. We have imputed an enlarged number of shares from 211.1m previously to 659.5m, which takes into account the 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 after being undervalued for years despite the fact that the group offers comparable earnings performance and balance sheet strength as well as growth potential. The improvement in liquidity should also further support and justify the higher valuation for the stock. At 18.5x PER, we derive a TP of RM2.95 and supported by the upside, we maintain our BUY recommendation. Although the potential price upside might be smaller than before, we reiterate our view that KPJ is an excellent choice for long term investment and portfolio balancing given its resilient business, steady dividend payout and growth potential in a defensive sector.

Comment:  Reading the analysts' recommendations from many trading houses, KPJ is a recommended buy..  Most earnings forecast are not too out of whack.  However, they have used a higher P/E for this stock of closer to 18, thereby giving a higher target price closer to $2.90. Until recently, KPJ was selling at P/E of 7.  This is based on their reasoning that even at this P/E, KPJ is cheap when compared to its regional peers. 

However, for the individual investor, the more important points are: 
  • At the present P/E, what is the probability of making a capital loss? 
  • At the present P/E, what is the probability of making a capital gain? 
The better role for the stock analysts is to prioritise protecting the investors against a potential loss, rather than being too bullish in their recommendations.  For the individual investors, there is no option but to do their own analysis and valuations.  As to their actions subsequently, these will be modified to suit their personal factors affecting their investing, namely, their time horizon, risk tolerance and investment objectives.


Anonymous said...

thx for the review bullbear..may i noe from which websites can i get all the information on local stocks(current P/E ratio, ROE, and other ratios)..i have tried reuters and,but they don't seems to update their info regularly..many thx in advance!!!

bullbear said...

These are extracted or calculated from the latest quarterly results released by the company available from the Bursa website.