We  see  the  MOU  that  KPJ  signed  for  the  development  of  KPJ Damansara Specialist 2 as positive and long overdue.  The new hospitalis  slated  to  cater  to  the  rising  demand  for  private  healthcare  in  the Damansara-Sungai Buloh  vicinity.  As the building  will take 36 months to  complete,  we  maintain  our  earnings  forecasts  at  this  juncture.Maintain NEUTRAL with a MYR3.67 TP (1.1% downside, 26x FY15F P/E).

Details on  the MOU.  KPJ Healthcare  (KPJ) signed  a memorandum of understanding  (MOU)  on  16  Oct  with  Pelaburan  Hartanah  (PHB)  and Nadayu Properties (NPB) for the  proposed development and lease  of a purpose-built  hospital  building,  to  be  known  as  KPJ  Damansara Specialist  2.  The  MOU  will  see  NPB  developing  a  300-bed,  9-storey hospital building and  a 636-bay car park  with  a  certificate of completion and  compliance  (CCC)  for  PHB  within  36  months  from  the  agreed execution  date.  PHB  will  then  execute  a  sale-and-purchase  agreement (SPA)  with  NPB  for  the  purchase  of  both  the  land  and  building. Subsequently, it will lease the  building to KPJ for a  15-year period, with an option of a renewal for  another 15 years.  The development will also include a new  exit ramp to the hospital. However, at this point in time, matters relating to the timeline and costs for the development have yet tobe finalised and disclosed.

Details  on  the  land.  The  land  on  which  the  hospital  is  to  be  built  is located in Mukim Batu, close to Sungai  Penchala in Kuala Lumpur. The total  area is expected to be approximately 6.176 acres.  The hospital willoccupy 2.95 acres of the gross area once it is completed. 

Rationale of MOU.  The three parties signed the MOU due to increasing development funding costs.  Management  believes  that established  Tier-1  hospitals  like  KPJ  Damansara  can  afford  to  pay  rent  immediately, thereby  easing  capex  that  can  be  channeled  towards  new  hospitals in smaller towns. KPJ Damansara Specialist has 211 beds currently.

Forecasts.  We  make  no  changes  to  our  earnings  forecasts  at  this juncture as  management disclosed  that  the  hospital  requires  36  months to  be  developed.  It  also  requires  an  additional  3-6  months  to  obtain approvals from relevant authorities before it can be open to public. 

Maintain  NEUTRAL.  We  maintain  our  NEUTRAL  call  and  TP  of MYR3.67  pending  further  disclosure  on  the  development.  Our  TP  is pegged to a 26x FY15F P/E, in line with its average 3-year forward P/E.

Source: RHB