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This article first appeared in The Edge Financial Daily on July 24, 2018

KPJ Healthcare Bhd
(July 23, RM1.04)
Maintain buy with a higher target price (TP) of RM1.30:
KPJ’s Indonesia operations suffered the brunt of new healthcare policies, effectively capping prices for its healthcare services. 4QFY17 losses alone dragged group 4QFY17 operating earnings by -9%. However, with innovative and shrewd policies, we believe the worst is over for KPJ’s Indonesia operations. It should allay fears of further dragging.

 

KPJ now expects the sale of its aged care centre in Australia, Jeta Gardens, to be finalised in 2HFY18 instead of 1HFY18. The pushback was due to the counterparty’s inability to gain adequate financing. More importantly, the exercise would alleviate headline earnings by 4% and ease KPJ’s lofty net gearing level to below 0.65 times from 0.70 times.

Despite the necessity of healthcare, patient volume growth took a noticeably step-down post implementation of goods and services tax in April 2015. With improved consumer affordability and sentiment, we expect a recovery in overall prospects to positively translate into volume growth gradually reverting back to previous norms.

We like KPJ for its (1) diminishing risk factors — Indonesia and Jeta Gardens, (2) improved industry prospects and (3) attractive valuation vs historical valuation (historical mean of 30x) and regional peers (56 times FY18 Price Earnings). Downside risk (1) spike in cost, (2) delayed corporate exercise and (3) slower-than-expected recovery in patient volume. — Affin Hwang Capital Research, July 23

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