• Maintain BUY and MYR1.66 TP (DCF), 19% upside and c.3% FY24F yield. KPJ Healthcare has entered into a business sale & purchase agreement with DPG Services (DPG) for the proposed disposal of its 57.2%-owned Jeta Gardens. We are positive on this , given the earningsaccretive nature. It also enables KPJ to realign its focus towards its domestic business, in our view. Valuation is compelling at 22x 2024F P/E, 0.5SD below its 5-year mean of 33x.

• The disposal involves KPJ forking out a MYR2.1m net cash payment (after accounting for differences between asset sale value and liability to be assumed by the purchaser) to DPG. Simultaneously, the land and buildings owner of Jeta Gardens – Al-Aqar Australia – also entered into a land sale contract for a cash consideration of MYR74.9m to Principal Healthcare Finance. Jeta Gardens is principly involved in the provision of residential care and retirement village services to Australia’s senior community. DPG is principally involved in the management of residential aged care communities within the metro and regional areas of New South Wales, Victoria, Queensland, Western Australia, and South Australia under the Opal Healthcare brand. Barring any unforeseen circumstances, the disposal is expected to be completed by 1Q24.

• This disposal enables KPJ to exit its loss-making aged care business in Australia. This segment is also facing challenging business prospects. The auditors of Jeta Gardens indicated within its independent auditors’ reports for FY21 and FY22 that a material uncertainty arising from the loss after taxation and a net liabilities position could cast significant doubt on Jeta Gardens Group’s ability to continue as a going concern. In this respect, KPJ has been providing financial support to Jeta Gardens when necessary to enable Jeta Gardens Group to meet its liabilities as and when due.

• We are positive on the disposal of the Jeta Gardens business given that, by removing the underperforming asset, KPJ can reduce its operating costs and cash flow requirements. Note: Jeta Gardens registered a net loss of MYR20.9m in 2022. Should the transaction be completed by 2024, this would result in potential earnings accretion of 8% based on our 2024 earnings estimate. We make no changes to our estimates pending materialisation of the disposal.

• Valuation. Keep BUY and MYR1.66 TP. We add 0% ESG premium/discount to the TP as KPJ’s ESG score is in line with the country median. We still like the stock for its key strategic direction down the road, encouraging health tourism growth, and gradual improvements in operating efficiency with its hospitals’ gestation periods likely to start contributing meaningfully to the group by 2024. Key risks: Lower-than-expected patient visits/revenue intensity growth and higher-than-expected operating costs.

Source: RHB Securities Research - 14 Dec 2023