It’s all systems go for  KPJ’s maiden venture in Bangladesh. Its strategy of  leasing  the  hospital  building  will  cap  the  group’s  start-up  losses while  allowing it to  expand its presence  in new markets  in  South Asia. While positive on  the  move, we keep  our  NEUTRAL  call on the stock, with an unchanged FV of MYR6.13 based on 26x FY14 P/E, as we remain cautious on the potentially weak results in the upcoming quarters.

• To operate new hospital in Bangladesh.  KPJ has signed a 10+5 year lease  for  a  newly-constructed  250-bed  hospital  known  as  “Sheikh Fazilatunnessa  Mujib  Memorial  KPJ  Specialist  Hospital”  some  50km from the Bangladesh capital of Dhaka. KPJ will operate the hospital.
• Two-pronged strategy.  We view this move as  strategic  since  this will allow  KPJ  to:  i)  expand  its  presence  in  the  South  Asia  markets,  thus enlarging  its  regional  presence  that  now  includes  Indonesia,  Australia and  Thailand,  and  ii) use  the  new  venture  as  a  platform  to  provide  its services  to medical tourists  from Bangladesh. According to the  Tourism and Culture Ministry, 11.6k Bangladeshis arrived in Malaysia  for  medical treatment last year.
• Firmly  in  KPJ’s  hands.  KPJ  will  bring  in  the  specialists,  nurses  and other  personnel  apart  from  hiring  local  professionals.  The  hospital’s operating costs  will be borne  solely by KPJ.  However, the group will not incur any cost  on the lease of the building  for the first five  years, but will thereafter  pay  a  variable  rate  based  on  10%  of  its  net  profit  after  tax. Note  that  KPJ  hospitals  typically  have  a  5-year  breakeven  period. We are leaving our forecasts  unchanged pending clarification.  As a 250-bed hospital  might  incur  MYR5-10m  in  start-up  losses  in  the  first  year  of operation,  including deprecation  cost, we feel  that  a lease strategy will help stem the losses.
• Maintain  NEUTRAL,  valuations  fair.    Maintain  NEUTRAL  and MYR6.13  FV,  pegged  to  an  unchanged  26x  FY14  P/E,  based  on  the stock’s  3-year  average.  We  remain  conservative  on  KPJ  as  we  are cautious of potential earnings disappointment  in the  upcoming quarters due to high start-up costs  since the group  plans to double its capacity to 5k hospital beds in Malaysia by 2020.

Recommendation Chart

Source: RHB