Highlights

• KPJ Bhd announced that its wholly owned subsidiary Pasir Gudang Specialist Hospital Sdn Bhd (PGSH) has entered into a sale and purchase agreement with Jcorp for the proposed acquisition of a piece of land in Johor Bharu for a total cash consideration before GST of RM12.06m.

• The land is adjacent to the location of KPJ Puteri Specialist Hospital which is owned and operated by PGSH. It measures1.655 acres (c.72,091.8 sqft) and is on a commercial title with a 99 year leasehold title expiring on the 21st June 2110.

• The acquisition will be funded via a combination of internally generated funds and bank borrowings. Inline – 9M17 revenue of RM2.4 RM101.0m, making up 6 consensus expectations.

• We deem this to be inline seasonally stronger quarte year earnings.

Financial Impact Comments

• As at 3Q17, KPJ Bhd had a cash balance of RM318.2m and a net gearing ratio 0.76x. As such, the acquisition is expected to be easily funded via cash.

• The rationale for the acquisition is in line with the group’s objective of network expansion in key growth areas. We believe that the acquisition will pave way for the group to expand the services and capacity of KPJ Puteri Specialist. To note, KPJ Puteri Specialist is one of the group’s oldest hospitals in its stables. It has an existing capacity of c.158 beds operating at 75% capacity utilization rate.

• As highlighted by management in their brownfield expansion schedule, KPJ Puteri Specialist is undergoing an expansion of c.66 beds which is scheduled to complete by 1Q19 and commence operations by 2Q19. We believe this acquisition will commence the next phase of expansion for KPJ Puteri Specialist.

• Based on our channel checks, land in Johor Bharu have recently transacted at a range of RM40-100+ psqft. As such relative to these recent transactions, we believe that the acquisition (c.RM165 psqft) is on the upper range of the valuations. However, we do note that this parcel is unique and can command such a premium as it is a synergistic acquisition and is the only parcel that can accommodate the expansionary project within the vicinity.

Risks

• Risks to the stock includes lower than expected ramp up in patient revenue due to a laggard price revision, higher than expected drug costs and longer than expected gestation period for its greenfield hospitals coupled with strong pricing competition from smaller niche hospitals. Risks to the stock include patient revenue due to a laggard price r expected drug costs and l period for its greenfield hos competition from smaller niche hospitals.

Forecasts

• Unchanged. Unchanged

Rating

• We like KPJ as it offers investors exposure to a pure Malaysian hospital play. Its niche lies in its regional hospital network that feeds patient into its urban specialist centres. Maintain BUY . We like KPJ as it off Malaysian hospital play. Its niche lies network that feeds patient Given the recent share price weakness, w to a BUY .

Valuation

• Maintain our SOP derived TP of RM1.18 (see figure#1)

Source: Hong Leong Investment Bank Research - 29 Nov 2017