News     In an announcement to Bursa Malaysia, KPJ Healthcare (KPJ) said it is acquiring a 100% equity stake in Rawang Specialist Hospital Sdn Bhd (RSHSB) for RM50.6m.

RSHSB is chiefly into operating and managing a specialist hospital as well as providing healthcare solutions where it is constructing a hospital building located in Section 16, Bandar Rawang and expects to operate it with 159 licensed beds.

RSHSB recorded a loss of RM0.1m in its FYE Mar 2012.

The Certificate of Completion and Compliance/Certificate of Fitness for Occupation in respect of the building is expected to be obtained by end-Jun 2013.

Comments     This latest acquisition is in line with KPJ plans to develop and expand its network of hospitals. We are positive on this latest corporate development by KPJ, but it is not sufficient enough a boost to upgrade our recommendation. This new hospital will add 159 licensed beds capacity or 6% of KPJ’s total operating beds of >2,500 beds. In our earnings model, we have assumed RM200m in capex each in FY13 and FY14.

For illustrative purposes, the RM50.6m acquisition will only be a small addition to KPJ’s net debt and net gearing of RM373m and 0.35x as at 31 Dec 2012.

We are keeping our FY13 earnings unchanged since this proposed acquisition is only expected to be completed by the end of 4QFY13. Moreover, we have assumed the expansion of two new hospitals p.a. in FY13 and FY14.

The proposed acquisition will allow KPJ to operate immediately from a completed hospital building and thus avoiding the usual gestation period of three years.

Outlook     Earnings over the next two years for KPJ are expected to come from the building of new hospitals as well as expanding its existing capacity and services.

For FY13, the KPJ Pasir Gudang Specialist hospital (120 beds), which has been fully constructed, is now awaiting the inspection and approval by the Ministry of Health. Expected to be finalised soon, it is likely to commence operations in 2Q2013 while both Sabah Medical Centre (250 beds) and KPJ Muar Specialist are expected to start by end-4Q2013. Looking into FY14, new hospitals in Bandar Datuk Onn, Johor Bahru (390 beds) and KPJ Pahang Specialist are targeted to start commencement.

Over the longer term, KPJ plans to build a new hospital each in Perlis, and Miri, Sarawak. We expect KPJ to expand into Terengganu and Melaka as well, of which it currently does not have a presence in. Elsewhere, we understand that plans are underway for the development of additional facilities on the remaining balance of a vacant land measuring 30-32 acres in Jeta Gardens. KPJ has also earmarked RM10m to add an additional 70 beds, bringing the total to 178 in FY13. Management has also earmarked a RM45m capex for the Nilai main campus expansion and the commissioning of a new campus at Bukit Mertajam, Penang. The Penang campus is expected to commence operations by end-FY13. Management aims to quadruple its student intake to 10,000 within 5 years.

Forecast    No changes to our forecasts.

Rating      Maintaining our MARKET PERFORM rating with a target price (TP) of RM6.37 based on 23.5x its FY14 fully diluted (FD) EPS, which is a 15% discount to its peers’ average due to its smaller market capitalisation.

Valuation     Based on our forecast, the stock is trading at 24.5x FY13 and 21.9x FY14 FD EPS numbers as compared to its average net profit growth of 13% p.a. over the next two years.

Risks      The key upside risk to our earnings forecast includes a faster-than-expected turnaround of its newly opened hospitals.

Source: Kenanga