News    In an announcement to Bursa Malaysia, KPJ Healthcare (‘KPJ’) has proposed; (i) a 1:2 bonus issue, (ii) a renounceable 1 for 15 rights issue of 43.9m new shares at an issue price of RM2.80 per rights share; and (iii) 87.9m new warrants will be issued on the basis of 2 new warrants for every 1 rights shares subscribed. 

Note that the bonus shares to be issued pursuant to the Proposed Bonus Issue will not be entitled to participate in  the Proposed Rights Issue and thus will not be taken into account in determining the number of Rights Shares to be issued to the Entitled Shareholders. 

The proposals are expected to be completed by 4Q 2013.

Comments    In other words, an investor who holds 15,000 RM0.50 shares initially will end up with 23,500 RM0.50 shares and 2,000 warrants at an additional cost of RM2,800. At a closing price of RM6.72, the theoretical ex-all price of the share is RM4.41. 

For illustrative purposes, the total of RM123.1m raised from the proposed rights issue (based on an indicative issue price of RM2.80 per rights share) are expected to be utilised as follows: (i) RM80m will be utilised to fund phase 1 of the expansion plan to construct a private specialist hospital in Bandar Dato’ Onn, Johor Bahru to be known as KPJ Bandar Dato’ Onn Specialist Hospital.  (The construction is expected to commence this year and  expected to be completed in year 2016), (ii) RM35m to pare down debt; and (iii) RM6.3m for working capital. The balance of RM1.8m is for expenses for the proposed corporate exercise. 

Based on our calculation, the exercise would dilute FY13 EPS by 4.4% (see Table 1). We are neutral-to-negative on this corporate exercise by KPJ.  The reasons are : (i) The exercise would be EPS dilutive; and (ii) KPJ’s net gearing would still remain the same despite utilising part of the proceeds to pare down debt.  The RM35m will only marginally reduce current net debt  and net gearing of RM470m and 0.45x as at 31 March 2013 to  RM435m and 0.42x respectively, very marginal improvements.

Separately, KPJ’s legal suit losses amounting to RM70.6m are expected to dampen trading sentiment on the stock.

We understand that KPJ is adamant that they will win back the legal case pending an appeal. In the meantime, KPJ is unlikely to make provision pending auditors’ approval. However, for illustrative purposes, the RM70.6m (damages and costs) would reduce KPJ’s 31 March 2013 NTA by 8% or by 11 sen/share from RM1.33 to RM1.22 and our FY13 net profit forecast by 48%.   

Outlook   Earnings over the next two years for KPJ are expected to come from setting up 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 end 2013 while both Sabah Medical Centre (250 beds) and KPJ Muar Specialist are expected to start by end-4Q2013. Looking ahead, new hospitals in Bandar Datuk Onn, Johor Bahru (390 beds) and KPJ Pahang Specialist are targeted to start commencement in FY14. 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 any presence.

Forecast   No changes to our forecasts.

Rating   Maintaining our MARKET PERFORM rating with a target price (TP) of to RM6.02 based on unchanged 23.5x FY14 Fully diluted (FD) EPS.

Valuation    Based on our forecast, the stock is trading at 29.8x FY13 and 26.3x FY14 FD EPS numbers as compared to its average net profit growth of 9% p.a. over the next two years.

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

Source: Kenanga