News  In an announcement to Bursa Malaysia, KPJ Healthcare (KPJ) via wholly-owned subsidiary, Puteri Nursing College Sdn Bhd (PNCSB), has proposed to dispose two parcels of freehold land and a building to 49%-owned AL-`Aqar Healthcare

REIT (AL-`Aqar) for RM77.8m cash and or part by issuance of new units in Al-`Aqar. Upon completion of the proposed disposal, KPJ will lease the building back.

 PNCSB is the owner of the properties and operator of KPJ Healthcare University College offering diverse academic programmes for professionals in the healthcare industry with an estimated 2,300 students at its main campus in Nilai  The proposed disposal will net an estimated gain of RM16.8m or 1.6 sen/share for KPJ.

Comments  This latest corporate development by KPJ would unlock the value of the properties, realise an estimated gain on disposal and raise fund for its working capital. The proceeds from the disposal would be used for repayment of borrowings (RM30m), working capital (RM8.3m) and expenses (RM0.6m). However, note that the RM30m repayment of borrowings is only a drop in the ocean against KPJ’s total borrowings of RM1.2bn as at 23 September 2014 which is expected to be stretched due to its future expansion plans.

 We maintain our earnings forecast since the savings from depreciation and borrowing cost will be offset by rental costs from leasing back the buildings.

Outlook  Earnings growth is expected to be pedestrian over the next few quarters. In Indonesia, we expect losses in Bumi Serpong Damai to persist over the next several quarters due to difficulty in attracting doctors to its establishment, leading to lower bed utilisation of 40%. However, this is expected to be negated by the profitable Medika Permata Hijau. For 2H14, the KPJ Sabah and Muar Medical Centre (120 beds) is expected to start by 3Q14. Looking into FY15, KPJ is targeting to open KPJ Perlis and KPJ Pahang Specialist. Additionally, KPJ is incurring higher staff costs due to: (i) the gradual addition of more beds since it needs to maintain a certain required ratio of staff per hospital, and (ii) KPJ employing more staff in its headquarters to support its on-going projects. We expect start-up losses from Sabah, Muar and Rawang to drag down earnings upon commencement due to the typical gestation period averaging between two to three years.

Change to Forecasts    No changes to our earnings forecast.

Rating & Valuation Maintain UNDERPERFORM with a TP of RM3.31 based on unchanged 27x FY15 EPS. The stock is currently trading at PERs of 34x for FY14E and 32x for FY15E, which appear rich, considering its average net profit growth of 15% p.a. over FY14E and FY15E.

Risks to Our Call  The key upside risk to our earnings forecasts is the faster-than-expected turnaround of its newly opened hospitals.

Source: Kenanga