This article first appeared in The Edge Financial Daily on January 4, 2018

KPJ Healthcare Bhd
(Jan 3, 98 sen)
Maintain buy with an unchanged target price of RM1.06: KPJ Healthcare Bhd disclosed in our recent meeting with the management that it is in an advance stage of disposing Jeta Garden, its care centre for the aged in Australia.

It is currently in the midst of realigning its operations to focus on delivering medical services. Jeta Garden will be sold at net tangible asset value and the proceeds will be recognised as a gain on disposal.

We understand that the disposal will only be completed by the first half of financial year ending Dec 30, 2018 (FY18) following an extraordinary general meeting in February 2018. Therefore, Jeta Garden will still be consolidated in FY17.

We also understand that KPJ Perlis which is slated to be completed in December 2017 is now waiting for the clearance from the ministry of health. It will be ready for operation sometime in January 2018.

As for the rest of its expansion plan, the hospitals that are expected to be opened after KPJ Perlis from FY18 to FY19 would be KPJ Bandar Dato’ Onn in Johor, KPJ Kuching, KPJ Miri and expansion of KPJ Sabah.

KPJ is also planning to expand its footprint in Indonesia in the medium to long term. Management believes that there is still value in Indonesia which is home to 255 million people as its gross margins in Indonesia remain high at 45% when compared against gross margins in Malaysia which tend to be to the tune of about 38% to 40%.

KPJ is also interested in Indonesia due to its lower labour costs and plenty of underserved areas. Also, by targeting to operate in cities outside of Jakarta which are underserved, it will also avoid competing head-on with Indonesia’s private healthcare service providers such as Mitra Keluarga Karyasehat and Siloam Hospitals in terms of getting medical doctors to have practices in the hospital.

We understand from management that there will be no new injection of greenfield hospitals into Al-Aqar REIT until FY19 as the company is trying to exhaust its reinvestment allowance tax on newly built greenfield hospitals.

However, there is a likelihood that KPJ will inject the expansions on matured existing hospitals that have been completed instead from FY18.

We are making no changes to our forecasts at this juncture as we opine that KPJ is on track to meet our earnings projections.

We are positive on the fact that KPJ has decided to exit Jeta Garden as we opine that the business has remained loss-making since it was acquired in 2010, and is showing no sign of turning around anytime soon.

This is despite the continuous effort by the management to turn around the operation, including adding more capacity to the facility in 2015. Furthermore, we believe that the management will be able to use the proceeds from the disposal to pare down debts (circa 0.71 times) and reinvest in expanding existing hospitals which will benefit KPJ in the future.

Going forward, we opine that growth will continue to be driven by higher contribution from newly opened hospitals, as well as improvements in contribution from its more matured hospitals.

We also view that the improving ringgit against the US dollar will bode well for KPJ as it will reduce the volatility and the cost of medical consumables which in turn will result in higher profitability. — MIDF Research, Jan 3