KPJ is selling its two operating units in Indonesia for a total enterprise value of RM150m. We are positive on the divestment which is in tandem with the group’s strategy to review its loss making operations and investments in Indonesia. Pending the completion of the deal, we maintain our earnings forecasts, TP of RM1.50 and OUTPERFORM call.

Divestment of Indonesian hospital removes drag on earnings. KPJ is selling two operating units in Indonesia for an enterprise value of RM150m. As part of the deal, an outstanding loan amount of RM143m owing from KPJM and AABSD will be fully repaid to KPJ. The proposed disposal involves the sale by KPJ’s loss-making units namely 75% stake in PT KPJ MEDICA (KPJM) and 100% stake in PT Al-Aqar Bumi Serpong Damai (AABSD) at a provisional price of RM13.6m. KPJM is a 200-bed specialist hospital and AABSD is the land and building owner of the hospital while the former operates the hospital. The divestment is expected to be completed by 2Q 2023. We are positive on this divestment which is in tandem with the group’s strategy to review its operations and investments in Indonesia which has been a drag on earnings over the past few years.

Impact to financial. For illustration purposes, impact to financial are as follow: - (i) KPJ is expected to record a RM60m gain on disposal, (ii) the RM150m is expected to reduce KPJ net debt and net gearing from RM1.4b and 0.64x to RM1.27b and 0.57x as at 31 Dec 2022, and (iii) the absence of RM14m net loss from both entities is expected to raise FY23E net profit by 6%. As at 31 Dec 2022, KPJM and AABSD incurred net loss of RM8.4m and RM7.7m, respectively.

Forecasts. Looking ahead into FY23, we project KPJ’s patient throughput to grow 14% (vs. 12% in FY22) and BOR of 66% (vs. 58% in FY22) as the demand for private healthcare services resumes its growth path post the pandemic.

We keep our earnings forecasts unchanged pending the completion of the deal. Our TP is RM1.50 based on 28x FY24F EPS, in line with its regional peers. There is no adjustment to TP based on ESG given a 3- star rating as appraised by us (see Page 4).

We continue to like KPJ for: (i) the low “price elasticity of demand” for healthcare service, which mean players are less vulnerable to high inflation as they could pass on the higher cost, (ii) it being a reopening play, especially for elective surgeries, and (iii) its strong market position locally with the largest network of 29 private hospitals (vs. only 16 of IHH Healthcare’s Malaysia operation in the second place). Reiterate OUTPERFORM.

Key risks to our call are: (i) regulatory risk, (ii) the lack of political will to roll out a national health insurance scheme, and (iii) longer-than-expected gestation periods for its newer hospitals.

Source: Kenanga Research - 2 Mar 2023