- We re-affirm our HOLD recommendation on KPJ Healthcare, with an unchanged fair value of RM6.47/share, based on our DCF valuation.

- KPJ has entered into sale and purchase agreement to acquire a 100%-equity stake in Rawang Specialist Hospital for RM50.6mil cash. Rawang Specialist shareholders comprise Mitrajaya Holdings (20%), Optimax Healthcare Services (56%), Wilayah Kontact (20%) and Registec (4%).

- Rawang Specialist is the only multi-discipline hospital servicing the Rawang area, comprising 159-licensed beds. We opine that the cost per bed of RM318K is reasonable, compared with RM475K per bed that was paid for an earlier acquisition in Malaysia, Sri Manjung Specialist Hospital. New hospital construction cost in Malaysia is typically at c.RM800K per bed.

- Rawang Specialist appears to be a new hospital, given that the Certificate of Completion and Compliance/Certificate of Fitness for Occupation is expected to be obtained by end-June FY13. It registered an audited loss after tax of RM128K and net current liabilities of RM9mil, at its March FY12.

- Acquisition will be funded internally by cash. As at end-FY12, net gearing stood at 25% with a cash cushion of RM251mil. KPJ expects to complete the acquisition by 4QFY13. This proposed acquisition is a positive for KPJ as it further expands its network of hospitals in Malaysia, supported by increasing demand for high quality private healthcare in the country.

- More importantly. KPJ is now expected to bring total bed capacity to 3,066 (+14%) by endFY13F. With the pipeline of four hospitals – Sri Manjung Specialist, Pasir Gudang hospital, Maharani Specialist and Rawang Specialist, the group would have a total of 25 hospitals in Malaysia by end-FY13.

- We maintain our earnings estimates at this juncture, pending further details from management. KPJ’s transparent growth trajectory will continue to be driven by greenfields, acquisition and expansion of existing hospitals.

- While we are positive on KPJ’s growth prospects and the healthcare sector outlook, the new hospitals would only begin to contribute meaningfully after the long gestation period. More importantly, we believe KPJ’s earnings momentum has been priced-in by the market. Hence, our HOLD call.

Source: AmeSecurities