KPJ Healthcare (KPJ) has announced a proposed disposal of its aged care business for a total consideration of AUD0.7m (equivalent to RM2.2m) to DPG Services. We view this proposed disposal positively as this strategic move aligns with KPJ and Al-`Aqar’s exit strategy in divesting assets and operations within the aged care business in Australia. This allows KPJ to reduce operating costs and redirect resources to more profitable business segments. Note that its aged care business has been a loss-making operation. As such, we raised our FY24-25 forecast earnings for KPJ by 11%-14% as we factor in lower operating costs. We maintain our Outperform call on KPJ with a higher SOTP-based TP of RM1.54, based on 10x EV/EBITDA.

• Details of proposed disposal. Both Jeta Gardens and Jeta Gardens Aged Care are 57.2%-owned subsidiaries of KPJ and they primarily engaged in the provision of residential care services and managing retirement village services for a community of seniors residing in independent living units or serviced units, sharing common facilities and amenities. The proposed business disposal consideration involves the sale of the aged care business for AUD0.7m (equivalent to RM2.2m). KPJ is expected to gain AUD3.5m (or RM10.8m) from this proposed disposal.

• Rational of proposed disposal. We view this proposed disposal positively as it is a strategic move for Jeta Gardens to exits the lossmaking aged care business. The operation has been reporting losses for the past 3 financial years, with LAT ranging from AUD4.8m (RM14.8m) to AUD10.6m (RM32.4m). In addition, the aged care business has been facing challenging prospects, as highlighted in auditors' reports indicating material uncertainty about the ability to continue as a going concern.

• Conclusion. We believe KPJ’s earnings trajectory would remain intact, buoyed by the continuous efforts to identify and optimize underperforming assets and with the Group's ongoing capacity expansions. We remain optimistic on KPJ’s long term prospect focusing on medical health tourism which enables it to charge premium pricing, bolstering revenue intensity and economies of scale to offset inflationary pressures.

Source: PublicInvest Research - 14 Dec 2023