This article first appeared in The Edge Financial Daily on April 11, 2019

KPJ Healthcare Bhd
(April 10, RM1.02)
Maintain hold with an unchanged sum-of-parts-derived fair value (FV) of RM1.15: KPJ Healthcare’s unit KPJ Tawakkal Specialist Hospital, located along Jalan Tun Razak, Kuala Lumpur, plans to construct a new tower block to add 120 beds. The expansion plan is still in the early stage and subject to the ministry of health’s approval. If all goes well, construction is expected to start by the end of financial year 2019 (FY19) and complete by end-FY22.

KPJ Tawakkal’s occupancy rate stood at around 70%. The hospital aims to increase its medical tourist patient visits to 15% from the current 7% through its medical tourism initiatives and service offerings.

As the hospital expansion is still in its early planning stage, we have not changed our forecasts. However, should the expansion plan go through, it will impact the group in the long term, improving its discounted cash flow (DCF) valuation. A quick calculation estimates its FV to increase to RM1.17 from RM1.15.

We maintain our estimate of 13% earnings before interest, taxes, depreciation and amortisation  margin for the group’s forecasted 2019 financial year (FY19F) as we expect gestation costs stemming from its new hospital openings to offset any margin boost from the group’s ongoing cost optimisation and increase in inpatient admissions.

KPJ opened KPJ Bandar Datuk Onn in Johor Baru in February and is expected to launch its KPJ Miri, KPJ Kuching and KPJ Batu Pahat hospitals in the second half of FY19 (2HFY19).

We like KPJ Healthcare for its vast network of hospitals in Malaysia, capacity expansion and its position to benefit from the national health insurance scheme. However, we believe at its current share price, the stock is close to its full valuation. At our FV of RM1.15 a share, the implied price to earnings is 23.8 times. — AmInvestment Bank, April 10