- We reaffirm our BUY recommendation on KPJ Healthcare with a fair value of RM7.90/share, based on a DCF valuation.

- In line with KPJ’s expansion plans, KPJ announced a joint venture agreement (JVA) with UTM Holdings Sdn Bhd to develop and operate a private hospital in Kulaijaya, Johor. KPJ effectively holds a 60% equity interest, while UTM Holdings holds the remaining 40%.

- UTM Holdings will lease the land for the greenfield project from Universiti Teknologi Malaysia and sub-lease portion of the land to the joint venture company. The lease is for a period of 30 years with an option for a further lease of 30 years via a sub-lease agreement. KPJ, on the other hand, will provide technical and management services for the construction of the hospital and will obtain planning approval. KPJ is also the appointed manager for the operation and administration of the hospital.

- The hospital will have multi-discipline services and is earmarked to have a capacity of 500 beds. The first phase would consist of 150 beds, costing RM128mil, comprising of land, building and medical equipment. The hospital is expected to commence operations in FY16F.

- We view this positively as KPJ and UTM Holdings could leverage on each other’s expertise in healthcare and education respectively. The JVA will also provide training ground opportunities for KPJ’s technical staff. The rising healthcare spending in Malaysia and ageing population will support KPJ’s expansion.

- KPJ is expected to commence operations of two new hospitals by the end of FY13F. Sabah Medical Centre and Rawang Specialist Hospital and currently awaiting their licenses from MOH. This would bring KPJ’s total operational hospitals to 24 (with additional 321 beds) in Malaysia by end-FY13F, with a 19% domestic market share.

- Balance sheet remains healthy. The group is sitting on a cash pile of RM291mil, as at 2QFY13. Our EPS forecast remain unchanged for now. All in all, our positive view on KPJ remains intact over the longer term, riding on the booming healthcare sector and medical tourism.

- Valuation wise, the stock is trading at forward PE of 31x, at a discount of 48% to IHH Healthcare (HOLD, FV: RM3.80/share).

Source: AmeSecurities