THE BUZZ
Yesterday, KPJ announced on Bursa Malaysia that it has entered into a Joint Venture Agreement(JVA) with Naim Land SB (NLSB) todesign, develop, build, complete and own a purpose-built hospital building in Miri, Sarawak as well asoperate this new hospital subsequently.
OUR TAKE
More on the JV. Under the JVA, KPJ will hold a 70% stake, with NLSB holding the remaining 30% stake.Pursuant to the JVA, NLSB will disposeof a piece of land measuring 4 acres in Kuala Baram Land District in Miriwith vacant possession given for the building of the proposed hospital, while KPJSB will provide the technical and management servicesfor the construction of the hospital building as well as assist the JV companyin matters relating to the construction and completion of the building. The name of the proposed hospital will be mutually agreed on by both parties in the future. We gather that the hospital will have a capacityof about 120 beds. While the total cost of setting up the proposed hospital wasnot disclosed, we believe that based on its bed capacity, the cost could range from RM80m to RM100m. Based on KPJ's standard practice, the proposed hospital will most likely commence operation with an initial capacity of between 60 and 90 beds.
Bigger footprint inEast Malaysia. Upon completion, thehospital will be KPJ's 3rd hospital in Sarawak and its fifth in EastMalaysia. We view the proposed JV positively as this move is in line with KPJ'sstrategy to increase its presence in East Malaysia in light of this region'sunderserved market and untapped potential for private hospitals. We gather there are currently several privatehospitals in Miri but most of them are small in size. We think there is strongdemand for private healthcare in Miri, which has a population of about 300,000 and a vibrant economy that isunderpinned by the oil and gas industry. That said, given Miri's proximityto Brunei, there is also potential for the proposed hospital to treatpatients from that country.
Maintain Buy. We maintain our Buy recommendation on KPJ, atan unchanged fair value of RM5.84, based on a FY12 PER of 23.1x. This multiple is derivedfrom the market cap-weighted average regional sector PER. We have always viewed KPJ as a stock with a compellinggrowth story which is further reinforced by the fact that it is in a relatively defensive sector. As such, we reiterate our view that the stock makes an excellent long-term investment.