KPJ  has  proposed:  i)  a  one-for-two  bonus  issue,  ii)  a  one-for-15 renounceable  rights  issue,  and  iii)  free  detachable  warrants  for  every rights  share  subscribed  at  two-for-one  ratio.  We  are  positive  on  the corporate  proposals  as  the  bonus  issue  will  improve  trading  liquidity while the issuance of rights and warrants will help to secure funding for its future capex. Maintain BUY, with our FV unchanged at MYR7.30.

- One-for-two  bonus  issue.  The  proposed  bonus  issue  would  increase its share base to 979.7m from 653.1m currently. This, in our view, could help to improve its trading liquidity in the long run.  

- One-for-15  renounceable  rights  issue.  The  proposed  rights  issue  is expected  to  raise  gross  proceeds  of  MYR121.9m,  assuming  an indicative  price  of  MYR2.80  per  rights  share.  This  implies  a  significant 36.5% discount pegged to its theoretical  ex-bonus and ex-rights (ex-all) price  of  MYR4.41,  based  on  its  last  closing  of  MYR6.72.  Of  the  total, MYR80.0m  will  be  allocated  to  fund  its  proposed  MYR250m  Bandar Dato’ Onn specialist hospital in Johor’s Iskandar region while MYR35.0m would  be  utilized  to  repay  some  of  its  existing  borrowings  of MYR627.0m.  On  a  side  note,  KPJ’s  major  shareholder  Johor  Corp  has agreed  to  subscribe  its  entitlement  in  full  as  well  as  undertaken  to subscribe for the remaining unsubscribed portion.   

- Two  free  warrants  for  every  rights  share  subscribed.  The  warrants, with a tenure of five years, could potentially raise MYR383.9m, assuming full  conversion  at  theoretical  ex-all  price  of  MYR4.41.  This,  we  believe, would  help  to  finance  KPJ’s  future  capacity  expansion  as  it  moves towards its target of 5,000 hospital beds by 2020, from 2,600 currently. 

- Maintain  BUY.  All  in,  we  view  the  corporate  proposals  positively  and advocate  investors  to  subscribe  for  the  rights  entitlement  as  KPJ’s fundamentals  are  well  intact.  We  deem  the  recent  sell-down  on  fears over  potential  legal  liability  unjustified,  given  that  Management  is  in  the midst  of  filing  an  appeal  and  the  potential  compensation,  in  the  event that KPJ loses the appeal, is one-off in nature. We make no changes to our forecasts. Maintain BUY, with our FV unchanged at MYR7.30 (or ex-all FV of MYR4.78) based on 26x FY14 P/E.

Source: RHB