MIDF Research reiterates buy call on KPJ

MIDF Research reiterates buy call on KPJ

Tags: Brokers Call | KPJ | MIDF Research

Written by Financial Daily
Friday, 31 July 2009 11:17

MIDF Research reiterated its buy recommendation on KPJ HEALTHCARE BHD [ KPJ 3.300 0.040 (1.227%) ] at RM3.06 with a target price of RM3.90 after the healthcare provider proposed to acquire an abandoned hospital building in Kapar, Klang for RM38 million to be developed as a private specialist hospital.

The research house maintained its FY09 and FY10 forecasts for KPJ under the assumption that the hospital would only show meaningful contribution to KPJ’s topline from FY12 onwards, while earnings would be about three to four years later.

KPJ’s wholly-owned Kumpulan Perubatan (Johor) Sdn Bhd has proposed to acquire Bandar Baru Klang Medical Centre building (BBKLC) for RM38 million cash.

The property is a partially completed six-level purpose-built private specialist hospital building with two levels of basement car park. CONSTRUCTION [Not Available] had been stalled since the Asian financial crisis in 1998.

MIDF said the further development cost was estimated at RM70 million, with expected completion by 2011. The acquisition will be funded via internally generated funds and/or borrowings.

The research house estimated that the new hospital, with its gross floor development area of 355,014 sq ft, would have about 200 beds, based on the gross floor area comparison with other KPJ hospitals.

The announcement of the acquisition came as a surprise given that KPJ had just announced the construction of a new hospital in Tanjung Lumpur, Kuantan last week, which is expected to commence operations by 2011, said MIDF.

“Besides, management has guided that their expansion strategy is to add one new hospital every year into their existing network.”

It added that as BBKMC would be KPJ’s first hospital in Klang, it could penetrate a lucrative private healthcare market with a substantial 1.05 million population.

The research house, however, was neutral on the overall development due to stiff competition and disadvantages of KPJ being a latecomer.

It said there are quite a few private hospitals in Klang, for instance, Pantai Klang Specialist, Sri Kota Medical Centre and Arunamari Specialist Medical Centre.

“From the long term, potential to capture the market share still exist, capitalising on KPJ’s strong brand name,” it said.

After incorporating KPJ’s capital expenditure assumption of RM100 million per annum, MIDF believed that funding was not an issue to KPJ to undertake further expansion in the future, backed by healthy net operating cash flow (averaged at RM150 million in the past two years).

“Although net gearing is expected to increase from current 0.2 times resulting from the recent acquisition, KPJ is still able to manage it at comfortable levels,” it added.

The research house said its buy call and target price was based on nine times FY09 price-earnings ratio (PER) or equivalent to 40% discount to the regional sector average of 15 times.

“We believe that our target price has already factored in KPJ’s lower earnings before interest and tax margin, which is 40% lower as compared to average regional peer’s of about 16%.

“Dividend yield of 5.7%-6.4% for FY09-10 are relatively attractive, taking into account current low interest rate environment,” it said.

With the favourable future outlook, underpinned by network expansion and increasing demand for private healthcare services, KPJ was definitely a compelling choice for long-term investment, said the research house.

“In addition, the Employees Provident Fund (EPF) is now KPJ’s third largest shareholder with 5.2% equity stake, after acquiring 10.9 million shares from the open market on July 8, according to the filing to Bursa Malaysia.

“Emergence of a strong institutional investor like EPF is another plus point to KPJ,” it said.

Yesterday, KPJ put on eight sen to close at RM3.14.


This article appeared in The Edge Financial Daily, July 31, 2009.