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KPJ Healthcare Bhd
(Oct 17, RM3.76)
Maintain neutral with target price (TP) of RM3.67:
We see the memorandum of understanding (MoU) KPJ has signed for the development of KPJ Damansara Specialist 2 as positive and long overdue. The new hospital is slated to cater to the rising demand for private healthcare in the Damansara-Sungai Buloh area.

As the building will take 36 months to complete, we maintain our earnings forecasts at this juncture.

KPJ signed an MoU on Oct 16 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 develop a 300-bed, nine-storey hospital building and a 636-bay car park with a certificate of completion and compliance (CCC) for PHB within 36 months of 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 renewal for another 15 years. The development will include a new exit ramp to the hospital.

At this point, matters relating to the timeline and costs for the development have yet to be finalised and disclosed.

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 (2.5ha). The hospital will occupy 2.95 acres of the gross area once it is completed.

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

We make no changes to our earnings forecasts at this juncture as management has said the hospital requires 36 months to be developed. It also requires an additional three to six months to obtain approvals from the authorities before it can be open to the public.

We maintain our “neutral” call and TP of RM3.67 pending further disclosure on the  development. Our TP is pegged to a 26 times forecast financial year 2015 price-earnings ratio (PER), in line with its average three-year forward PER. — RHB Research, October 17, 2014

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This article first appeared in The Edge Financial Daily, on October 20, 2014.

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