INVESTMENT HIGHLIGHTS

• Proposed disposal of 30% equity stake in Hospital Penawar

• Lawsuit against KPJ by Hospital Penawar shareholders

• Equity stake disposal in best interest of KPJ

• No changes to earnings forecasts

• Maintain NEUTRAL with unchanged TP of RM4.05

Proposed disposal of 30% equity stake in Hospital Penawar. KPJ Healthcare has entered into a sale and purchase agreement (SPA) with Dr. Mohd Adnan Sulaiman and Azizan Sulaiman for the disposal of its 30% equity stake in Hospital Penawar located in Johor Bahru, Johor Darul Takzim. Dr. Adnan and Azizan are the major shareholders of Hospital Penawar holding a combined 70% equity stake in the hospital. The disposal involves the sale of 720,000 shares for a total cash consideration of RM2.21m to the aforementioned purchasers. The disposal is expected to be completed within a three months period.

Lawsuit against KPJ by Hospital Penawar shareholders. Recall that back in May 2012, KPJ was served with a lawsuit by the major shareholders of Hospital Penawar. This is on the grounds that KPJ has breached the joint-venture (JV) agreement between the two parties with the construction of KPJ Pasir Gudang Specialist Hospital which offers the same services as Hospital Penawar and pose as a competition to the latter due to the close proximity of the two hospitals. In July 2013, the Johor Bahru High Court ordered KPJ to pay RM70.4m in damages to Hospital Penawar for breaching its JV agreement. However, in December 2013, the decision was turned by the same court after KPJ submitted an appeal against the earlier ruling thus, winning the lawsuit.

Equity stake disposal in best interest of KPJ. We view the equity stake disposal is in the best interest of KPJ. Putting aside the lawsuit, this disposal will allow KPJ to focus on its wholly-owned companies for better management and decision making. Additionally, the disposal will also result in a consolidated KPJ group of hospitals whereby the operations under a single entity for various operational, financial and corporate structure will allow for further enhancement in efficiency in the aforementioned areas within the group. We understand from the management, the cash proceeds from the disposal will be used for its working capital requirement and general corporate purposes.

Source: MIDF Research - 2 Dec 2016