KPJ Healthcare - A healthy start BUY

- KPJ Healthcare Bhd (KPJ) posted a decent net profit of RM33mil for 1QFY12. Annualised, this accounts for 21% and 22% of our forecast and street estimates, respectively. We deem the results to be broadly in line with both our and market expectations, given rising contributions from an enlarged network of hospitals.

- Management declared a single-tier interim dividend of 2.5 sen/share, bringing total dividends declared YTD to 7.2 sen. This make up 50% of our DPS forecast for FY12F. 

- The group registered a higher turnover and net profit for 1Q, growing 20% and 21% YoY, respectively. The improved performance was attributable mainly to higher contributions from domestic hospital operations (Pre-tax: 25% YoY) which more than offset losses incurred from its Indonesian arm and aged-care division (via 51%-owned Jeta Gardens Waterford Trust).  

- On a sequential basis, 1Q net profit declined 16% as the benefits of topline growth was negated by:- 1) a 2.3ppts EBITDA margin compression due to higher costs of sale and; 2) higher interest expense of RM3mil.

- Moving forward, we expect its loss-making Indonesian operation to turn around by year-end on the back of a rising number of patients at the newly-opened hospitals. However, its retirement/aged care JV is likely to remain in the red for FY12F due to the longer gestation period.   

- KPJ is on track to extend its earnings momentum as underpinned by its hospital expansion plans. Commissioning of two new hospitals – Sabah Medical Centre in Kota Kinabalu & Pasir Gudang, Johor – by end-2012 will boost bed capacity by 14% to 2,970.  

- Additionally, the group will be adding 7 new hospitals by FY15F to cater to rising healthcare demand, notably the more lucrative medical tourism. Organic expansion aside, management is on the lookout for potential brownfield acquisitions in the region, notably in Cambodia, Vietnam and Thailand. 

- We maintain BUY on KPJ with an unchanged DCF-based fair value of RM6.15/share. Valuations at fully diluted PERs of 23x and 19x FY12F-13F earnings remain attractive vis-avis regional peers (8%-10% discount to closest competitor Thailand’s Bumbungrad Hospital, and a wider 18%-20% discount to regional peers’ average). 

- Besides, an anticipated sector wide re-rating is well supported by the impending listing of Integrated Healthcare Holdings (IHH) which has acquired assets at 16x-26x.

Source: AmeSecurities