INVESTMENT HIGHLIGHTS

• Proposed 1:4 share split

• Share split to improve liquidity

• Earnings forecasts maintained but EPS to be diluted

• Maintain NEUTRAL with an unchanged TP of RM4.30

Proposed 1:4 share split. KPJ Healthcare announced that it is proposing a 1 to 4 share split. The proposed share split will enlarge the current share base of KPJ from 1,190m to 4,759m shares assuming that all outstanding ESOS options (38.7m) and warrants (86.6m) are fully exercised. The share split exercise is expected to be completed by the third quarter of 2017.

Share split to improve liquidity. We understand from the management that the share split exercise is undertaken mainly to boost trading liquidity of KPJ shares. As the newly split ordinary shares will be nominally cheaper compared to the current price of KPJ shares, KPJ expects to attract more potential investors to participate in the growth of the company going forward. In addition, the share split is also to allow the current shareholders of KPJ to own a larger number of ordinary shares in KPJ while maintaining their percentage of equity interest in KPJ.

Earnings forecasts. Following the share split announcement, we make no changes to our earnings forecasts as the exercise does not have any impact on KPJ’s earnings. However, we do note that the newly enlarged share base will dilute the earnings per share (EPS) post the share split exercise from the current 15.9sen per share to 3.98sen per share.

Maintain NEUTRAL with a unchanged Target Price (TP) of RM4.30. We are maintaining our NEUTRAL recommendation on KPJ with a SOP-based TP of RM4.30 per share (TG: 3.0%, WACC: 7.84%) for now pending the completion of the share split. Post completion, our TP will be adjusted to RM1.08 per share. Going forward, we anticipate higher contribution from newly opened hospitals as well as improvements in contribution coming from its more matured hospitals. We are encouraged on the fact that KPJ managed to maintain its patient admissions number, which we think stemmed from the gradual recovery in consumer sentiment.

Additionally, KPJ has also undertaken a price revision exercise back in October 2016 to cater for the increasing operational costs which we think will assist in its revenue growth in FY17. That said, we remain wary on the current currency environment of a strong USD against MYR which might continue to put pressure on its operating expenses.

Source: MIDF Research - 21 Apr 2017