KPJ Healthcare Bhd
(Oct 7, RM3.95)
Maintain “underperform” with an unchanged target price (TP) of RM3.31: In an announcement to Bursa Malaysia, KPJ Healthcare (KPJ) via its wholly-owned subsidiary Puteri Nursing College Sdn Bhd (PNCSB) has proposed to dispose of two parcels of freehold land and a building to 49%-owned Al-Aqar Healthcare REIT for RM77.8 million cash and/or partly new units in Al-Aqar. Upon completion of the proposed disposal, KPJ will lease the building back.
PNCSB is the owner of the properties and operator of KPJ Healthcare University College offering diverse academic programmes for professionals in the healthcare industry with an estimated 2,300 students at its main campus in Nilai, Negeri Sembilan. The proposed disposal will net an estimated gain of RM16.8 million or 1.6 sen per share for KPJ.
This latest corporate development by KPJ would unlock the value of the properties, realise an estimated gain on disposal and raise funds for its working capital. The proceeds from the disposal would be used for repayment of borrowings (RM30 million), working capital (RM8.3 million) and expenses (RM0.6 million).
However, note that the RM30 million repayment of borrowings is only a drop in the ocean against KPJ’s total borrowings of RM1.2 billion as at Sept 23, 2014, which is expected to be stretched due to its future expansion plans.
We maintain our earnings forecast since the savings from depreciation and borrowing cost will be offset by rental costs from leasing back the buildings. Earnings growth is expected to be pedestrian over the next few quarters. In Indonesia, we expect losses in Bumi Serpong Damai in the Tangerang District, Jakarta, to persist over the next several quarters due to difficulty in attracting doctors to its establishment, leading to lower bed utilisation of 40%. However, this is expected to be negated by the profitable Medika Permata Hijau hospital in Jakarta. For the second half of 2014, KPJ Sabah Specialist Hospital and Muar Specialist Centre (120 beds) are expected to start operations by the third quarter of 2014.
Looking into financial year 2015 (FY15), KPJ is targeting to open KPJ Perlis and KPJ Pahang Specialist hospitals. Additionally, KPJ is incurring higher staff costs due to: i) the gradual addition of more beds since it needs to maintain a certain required ratio of staff per hospital; and ii) KPJ employing more staff in its headquarters to support its ongoing projects.
We expect start-up losses from Sabah, Muar and Rawang to drag down earnings upon commencement due to the typical gestation period averaging between two and three years.
Maintain “underperform” with a TP of RM3.31 based on unchanged 27 times FY15 earnings per share. The stock is currently trading at price-to-earnings ratio of 34 times for FY14 estimate (E) and 32 times for FY15E, which appears rich, considering its average net profit growth of 15% per annum over FY14E and FY15E.
The key upside risk to our earnings forecasts is the faster-than-expected turnaround of its newly opened hospitals. — Kenanga Research, Oct 7
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This article first appeared in The Edge Financial Daily, on October 8, 2014.