Highlights

• KPJ announced that its wholly owned subsidiary Lablink (M) Sdn Bhd had on the 23rd Janurary entered into a subscription and share purchase agreement (SSPA) with Quadria Capital (via its subsidiary KL Kappa Sdn Bhd) for the selling of existing Lablink shares as well as a share sale that will collectively results in Quadria Capital owning a 49% stake in Lablink’s enlarged share based with the remaining 51% stake being held by KPJ.
• Quadria Capital shall subscribe for new Linklab shares and purchase existing Lablink shares from KPJ for a total cash consideration of RM119.9m.
• Quadria Capital Investment Pte Ltd has c.USD1.5bn invested in 18 healthcare companies across Asia Pacific (India, Bangladesh, Vietnam, Singapore & Phillipines) with c. 45% of the fund invested in healthcare delivery (hospitals and other forms of clinical care) 30% apportioned to life sciences (pharmaceutical manufacturing companies) and the remainder of the fund apportioned towards healthcare services relating to support delivery and treatment of healthcare.
• KPJ undertakes to Quadria Capital that the proceeds received from the allotment and issue of the subscription share shall be used solely to fund the growth and expansion of Lablink’s business.
• This proposal is expected to be completed by 1QFY18.
• Inline – 9M17 revenue of RM2.4bn translated into PATAMI of RM101.0m, making up 64.7% of HLIB and 65.8% of consensus expectations.
• We deem this to be inline as historically the 4Q has been the seasonally stronger quarter, accounting for 32-36% of full year earnings. Financial Impact Comments
• As at 3Q17, KPJ had a cash balance of RM318.2m and a net gearing ratio 0.76x. Assuming that the proceeds from the SSPA will be utilized to offset against borrowings, our implied pro forma net gearing will decrease to 0.69x from 0.76x.
• The rationale for this disposal is in line with the group’s expansion plans for its pathology and diagnostics business . This partnership will allow KPJ to expand its reaches into new growth markets in the South East Asia region with a seasoned partner, whilst simultaneously shifting the capex burden at the holding level. As such we view this disposal in a positive light.
•  

Risks

• Risks to the stock includes longer than expected gestation period for this partnership to yield fruition with respect to its proposed synergistic objectives.
•  

Forecasts

• Unchanged, this disposal is not expected to have any material impact to the group’s core earnings in the near term.
• Unchanged

Rating

#bull# 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 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. Given the recent share price weakness, we upgrade the stock to a BUY.

Valuation

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

Source: Hong Leong Investment Bank Research - 24 Jan 2018