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Author: kiasutrader   |   Latest post: Wed, 8 Feb 2017, 11:21 AM

 

KPJ Healthcare - Transition for next phase of growth Hold

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- We reaffirm our HOLD recommendation on KPJ Healthcare with a revised ex-all fair value of RM3.85/share (vs. RM6.00/share previously), based on our DCF valuation, following an enlarged share base from its corporate exercise.

- The corporate exercise includes:- (1) 1-for-2 bonus issue of up to 330mil shares; (2) 1-for-15 renounceable rights issue of up to 44mil shares at an exercise price of RM2.80/share; and (3) Detachable warrants per rights issue of up to 88mil warrants at an exercise price of RM4.01/warrant.

- The bonus and rights issue would increase its share base by c.60% to 1bil. The rights proceeds of RM123mil would be used for the construction of the Bandar Dato’ Onn Specialist Hospital (65%), debt repayment (28%) and working capital (4%).

- A full conversion of the warrants would increase KPJ’s share base by 9% to 1.1bil. As the exercise period of the warrants is for five years, the impact of the dilution would not be immediate.

- KPJ will raise proceeds of RM353mil if all of the warrants were to be converted. This would help in funding future capacity expansion given eight new hospitals by FY16 with more than 1,500 beds will come on-stream once they are fully operational. As at end-3QFY13, the group had cash of RM236mil.

- While new hospitals would be the key earnings driver, EPS growth is expected to be flat at c.4% in the next few years as a result of start-up losses from the new hospitals, with stronger earnings visibility expected in FY16F.

- Gearing is expected to decrease to 0.3x in FY14F from 0.5x in FY13F, due to the rights proceeds.

- Although KPJ is well-positioned to ride on the growing domestic private healthcare sector and ageing population, its earnings weakness is vulnerable to the potential longerthan- expected gestation period for new hospitals, which typically takes 3-5 years.

- The major overhang on the stock is now lifted following KPJ’s winning on appeal in the civil suit initiated by Hospital Penawar, which would have cost RM71mil (>50% of FY14F’s earnings).

- At the current level, the stock is trading at fully-diluted 44x PE of FY14F, above its historical peak of 34x. Valuation is lofty relative to regional peers at 28x.

Source: AmeSecurities

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