KPJ (FV RM5.84 - BUY) Corporate News Flash: Building on Its Indonesia Network

THE BUZZ

Last Friday KPJ has announced on  Bursa Malaysia that  its  major shareholder  Johor Corporation (JCorp) had on 27 Feb 2012 offered to sell its entire equity holding in PT KPJ Medika comprising  16,000 ordinary shares of IDR1m each, or equivalent to 80% equity in PT KPJ Medika, for a total cash consideration of RM15.84m. KPJ said it had, via a letter dated 23 March 2012, accepted the offer.

OUR TAKE

More on the deal. PT  KPJ  Medika (Medika)  owns  and  operates  a  private  specialist  hospital  known as Rumah Sakit Medika Permata  Hijau  (RSMPH) in Jakarta West, Indonesia with 92 beds. KPJ has been managing the hospital on behalf of JCorp for the last 15 years, for which KPJ receives an annual fee of about RM0.25m. The remaining 20% stake in Medika is held by  a  local partner  to comply with Indonesia’s  foreign ownership regulations.

A good deal. The acquisition came is as no surprise as it is in line with KPJ’s strategy to expand its hospital network in Indonesia in order to tap the strong potential demand for private healthcare in Indonesia. Although this is a related party transaction (RPT), there is no cause for concern as it represents a win-win transaction between JCorp and KPJ. Disposing of its direct interest in Medika will enable JCorp to consolidate its healthcare business under KPJ while KPJ would be able to build its hospital network in Indonesia. At RM15.84m for an 80% stake in Medika, this translates into a PER of approximately 8.7x on Medika’s FY11 core net profit. As such, we view the purchase price as attractive compared with the minimum regional sector PER of 15x PER among listed healthcare players. The acquisition will also enable KPJ to build on its pool of resources as well as create synergy with RS Bumi Serpong Damai, KPJ’s existing hospital in Jakarta.

Maintain BUY. We maintain our Buy recommendation on KPJ, at an unchanged FV of RM5.84, based on 23.1x PER on FY12 EPS. This multiple is derived from the market cap weighted average regional sector PER. We have always liked KPJ as a stock with a growth story, and one that is in a rather defensive sector. We reiterate our view that the stock is an excellent long term investment.

Source: OSK188