News

In  an  announcement  to  Bursa  Malaysia,  KPJ Healthcare  (KPJ)  via  its  wholly-owned  subsidiary, Seremban  Specialist  Hospital  Sdn  Bhd,  a  whollyowned subsidiary of KPJ (SSHSB), had entered into a  SPA  with  the  AmanahRaya  Trustees  Berhad, being  the  trustee  of  Al-`Aqar  Healthcare  REIT  to dispose  a  parcel  of  freehold  land  in  Seremban, Negeri  Sembilan  to  Al-`Aqar  for  a  total  cash consideration  of  RM4.3m.  Upon  completion  of  the proposed disposal, KPJ will lease the building back.

SSHSB  had  on  Mar  2012  obtained  the  approval from  Majlis  Perbandaran  Seremban  in  relation  to the building plans for the proposed expansion of the KPJ  Seremban  Specialist  Hospital,  which  includes construction  of  an  additional  eight  (8)-storey physician  consultant  block  and  a  six  (6)-storey annexe  block  on  the  Existing  Al-`Aqar  Land (collectively referred to as “New Buildings”) together with  Facilities.  The  construction  of  the  New Buildings,  which  is  undertaken  by  SSHSB,  is expected to be completed in November 2015.

The proposed disposal will net an estimated gain of RM0.6m for KPJ.

Comments

This  latest  corporate  development  by  KPJ  will unlock  the  value  of  the  properties,  realise  an estimated  gain  on  disposal  and  raise  fund  for  its working capital.

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.

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 opening 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 earnings  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 RM3.54 based on  unchanged 27x FY16 EPS. The stock is currently trading at PERs of 33x and 31x on FY15E and  FY16E,  which  appear  rich  as  compared  to  its pedestrian net profit growth.

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 Research - 20 Mar 2015