KPJ Healthcare; Fully Valued
Price Target: RM4.65; KPJ MK

KPJ has entered into a Sale and Purchase Agreement (SPA) with the shareholders of Rawang Specialist Hospital Sdn Bhd (RSHSB) for the acquisition of 100% equity interest in RSHSB for RM50.6m. RSHSB has an existing loan granted by Malayan Banking Berhad of RM37.5m which will be asssumed by KPJ. Hence, the total acquisition cost works out to be RM88.1m.

The hospital is in the midst of being constructed and the Certificate of Completion and Compliance/ Certificate of Fitness for Occupation in respect of the Building (CCC) is expected by the end of June 2013. RSHSB shall be the only multi-discipline specialist hospital catering to Rawang and its surrounding area with more than one million population. It has been granted the approval from the Ministry of Health, Malaysia to operate with 159 licensed beds.

KPJ should comfortably be able to finance this smallish acquisition with its net debt of RM373m (net gearing of 33%) as at 4Q12. We expect no meaningful earnings contribution till 3 years which is typically the gestation period for a greenfield hospital.

We maintain our Fully Valued rating with our TP of RM4.65, pegged to 20x EPS, which is +2SD of its historical mean. Although we are generally positive on the healthcare industry, the stock is expensive at 24x EPS.

Source: HwangDBS Research - 18 Apr 2013