INVESTMENT HIGHLIGHTS

• Proposed acquisition of land in Bandar Johor Bahru

• 6,700 sqm leasehold land with 99-year lease

• Acquisition for future expansion of KPJ Puteri

• No impact on gearing

• Earnings forecasts maintained

• Maintain NEUTRAL with an unchanged TP of RM1.06

Proposed acquisition of land in Bandar Johor Bahru. KPJ Healthcare announced that it has entered into a sales and purchase agreement (SPA) via its wholly-owned subsidiary Pasir Gudang Specialist Hospital (PGSH) to acquire a piece of land in Bandar Johor Bahru with Johor Corporation (JCorp) for a purchase consideration of RM12.06m.

6,700 sqm leasehold land with 99-year lease. The land which is to be acquired by PGSH is a 6,700 sqm (1.655 acres) of land with a 99- year lease expiring on 21 June 2110. The land is located adjacent to the piece of land where KPJ Puteri hospital is presently located on. The land was professionally valued at RM12.1m. Therefore, the purchase price of RM12.06m represents a discount of RM40k or approximately 0.3% below the market price of the land which we think is fair.

Acquisition for future expansion of KPJ Puteri. We opine that the acquisition of land adjacent to KPJ Puteri is slated to be used for future expansion of KPJ Puteri. Should the land be used for expansion of KPJ Puteri, we believe that this will enable KPJ to serve a wider customer base in surrounding areas with demands for quality private healthcare services.

No impact on gearing ratio. We understand from the management that it intends to satisfy the purchase consideration via both internally generated fund as well as borrowings. After deducting the 10% deposit of RM1.026m, the balance of the total purchase price is RM10.854m. Assuming that 50% of the amount or RM5.427m is borrowed, the impact on KPJ’s gearing is negligible. KPJ’s net gearing post-acquisition remains unchanged at 0.71x.

Earnings forecasts. We are neutral on the acquisition as any development on the land will take two to three years to be developed post successful acquisition of the land. Therefore, we are making no changes to our earnings estimates at this juncture.

Maintain NEUTRAL with an unchanged Target Price (TP) of RM1.06. We are maintaining our NEUTRAL recommendation on KPJ with an unchanged SOP-based TP of RM1.06 per share (TG: 3.0%, WACC: 7.84%). Despite the acquisition will result in a potential expansion of KPJ Puteri and will contribute positively to the topline of KPJ, we opine that it will take a while (approximately two years) for the expansion or any development on the land to take place given the current pipeline of KPJ’s hospital expansions. Therefore, going forward in terms of revenue, we anticipate higher contribution from newly opened hospitals as well as improvements in contribution coming from its more matured hospitals. However, challenges persist as competition from public hospitals, general practitioners (GPs) and other private hospital operators are intensifying with all parties trying to provide the best value-for-money healthcare services. In addition, we opine that the absence of price revision since early of this year could potentially hurt earnings due to higher operating expenses incurred.

Source: MIDF Research - 29 Nov 2017