News  In an announcement to Bursa Malaysia, KPJ Healthcare (KPJ) via wholly-owned subsidiary, Kumpulan Perubatan (Johor) Sdn Bhd (KPJSB), signed a Joint Venture (JV) Agreement with UTM Holdings Sdn Bhd (UTM Holdings) for the purpose of designing, developing, building, completing and owning, and subsequently operating a private hospital on a portion of a leasehold land in Kulaijaya, Johor.

 KPJ will hold 60% equity stakes with 40% owned by UTM.

 Pursuant to the JV, UTM shall lease the land from Universiti Teknologi Malaysia (UTM) and sub-lease a portion of the land to the JV company for a period of thirty years with an option for a further lease of thirty years. In turn, KPJ shall provide the technical and management services for the construction of the hospital building and shall use its best endeavour to assist the JV company in obtaining the planning approval in relation to the hospital building.

 KPJ is expected to operate and manage the private hospital.

Comments  This latest acquisition is in line with KPJ’s plans to develop and expand its network of hospitals. The first phase will be equipped with 150 beds costing RM128m, including land, building and medical equipment. Eventually, the hospital will have a maximum capacity of 500 beds or approximately 17% of KPJ’s total beds.

 Since the hospital is only expected to be ready in two years time, we are maintaining our FY13 and FY14 earnings forecasts.

 For illustrative purposes, KPJ has to fork out RM76.8m based on its 60% stake. Together with the recently announced acquisition of a private hospital in Rawang for RM88.1m (including debt), KPJ’s net debt and net gearing is expected to balloon from RM568m to RM733m and 0.54x to 0.69x.

Outlook  Recall, on 26th July 2013, the Johor Bahru High Court had allowed the claim by Dr Mohd Adnan bin Sulaiman and Azizan Sulaiman (plaintiffs) against KPJ wherein both plaintiffs alleged that KPJ had breached the Joint Venture Agreement dated 30th May 1995 whereby the said High Court had awarded the sum of RM70.6m including costs. According to the quarterly notes accompanying the interim financial report, a notice of appeal against the whole judgement has been filed at the Court of Appeal and case has been fixed on 26th September 2013.

 In the meantime, the above-mentioned judgement sum has not been provided for in this quarterly result. However, for illustrative purposes, the RM70.6m (damages and costs) would reduce KPJ’s 30 June 2013 NTA by 8% or by 11 sen/share from RM1.35 to RM1.24. Our FY13 net profit forecast would reduce by 50%.

 Earnings contribution over the next two years is expected to come from the setting up of new hospitals as well as the expansion of its existing capacity and services. The planned capex in FY13 and FY14 are estimated at between RM200m and RM250m p.a.

Forecast  No changes to our forecasts.

Rating   Maintaining our UNDERPERFORM rating with a target price (TP) of RM5.75 based on unchanged 23.5x FY14 Fully diluted (FD) EPS.

Valuation  Based on our forecasts, the stock is trading at 29.3x FY13 and 25.3x FY14 FD EPS numbers as compared to its average net profit growth of 7% p.a. over the next two years.

Risks to Our Call The key upside risk to our earnings forecast includes a fasterthan-expected turnaround of its newly opened hospitals

Source: Kenanga