AMID heightened market volatility and a moderating economy, healthcare is one of the few sectors that continue to offer earnings visibility and resilience. KPJ Healthcare Bhd is picked by both Affin Hwang Capital and RHB Research as their high-conviction “buy” for the sector.
RHB Research has a target price of RM5 on the stock, implying an upside potential of 15.7%, based on its RM4.32 close last Wednesday. Indeed, KPJ’s shares have held up relatively well with a 2.4% year-to-date return, even as IHH Healthcare Bhd declined 0.8% and the FBM KLCI fell 2.6%.
KPJ, the country’s largest private hospital operator with a leading 23% market share, is aggressively expanding to drive mid-term earnings growth. It plans to set up nine new hospitals over the next five years, adding 1,200 beds to 4,900 by 2019.
In 1Q2016, revenue grew 5% year on year to RM743.9 million as patient traffic recovered. Excluding stock-based employee option expenses, core net profit expanded 19% to RM40.3 million on improved margins.
After a decline in 2013 due to gestation, JP Morgan (target price: RM4.70) expects KPJ’s margins to gradually improve to mid-teen levels as more new hospitals mature. A high gearing ratio of 77% notwithstanding, KPJ has the option to inject assets into its 45%-owned Al-Aqar Healthcare REIT.
Despite the good 1Q2016 results, the company still trades at a trailing price-earnings ratio of 33.6 times, below its three-year mean of 30.7 times. RHB Research believes that it does not deserve to trade at a steep discount to its regional peers as near-term earnings risks are well priced in and its long-term prospects remain intact.
According to M&A Securities, KPJ saw encouraging 4.5% inpatient volume growth and 2% outpatient volume growth in 1H2016 and management is confident of achieving similar growth in the next half.
Aggressive investors who wish to gain exposure to the stock can consider KPJ-WB, which has a one-to-one conversion ratio and RM4.01 strike price. It expires on Jan 23, 2019.
Year to date, KPJ-WB has performed strongly, gaining an outsized 45.7% to 76.5 sen — a 10.5% premium to the underlying share.
Nonetheless, if KPJ rises 15.7% to reach RHB Research’s RM5 target price, KPJ-WB should theoretically be worth 29.4% more at 99 sen, assuming zero premium to the mother share.
RHB Research’s target price is among the most bullish of the five analysts with a “buy” on KPJ. Thirteen others have a “hold”, with target prices averaging RM4.51 a share, Bloomberg data shows. Affin Hwang and TA Securities are the most bullish with a target price of RM5.01 and RM5.10 respectively. Credit Suisse and Public Investment Bank are the most bearish at RM4 and RM4.01 respectively.
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