KPJ Healthcare - Sawadee, Bangkok!

THE BUZZ  
 Last  Friday,  KPJ  announced  on  Bursa  Malaysia  that  its  wholly-owned  subsidiary,Kumpulan  Perubatan  Johor  SB  (KPJSB),  had  entered  into  a  sale  and  purchaseagreement to acquire a 23.37% stake in Vejthani PCL (VPCL) for a total consideration ofTHB605.616m (RM60.529m).

OUR TAKE  
 More on the deal. Under the share sale and purchase agreement, KPJSB  will acquire8m  preference  shares  in  VPCL  from  Aureos  South-East  Asia  Fund  LLC  (ASEA)  andGSB  Private  Fund  (GSB),  representing about  a  23.37%  equity  stake  in  VPCL,  for  totalcash  consideration  of  about  THB605.6m.  VPCL  operates  a  500-bed  multi-disciplineprivate  hospital  known  as  Vejthani  Hospital  in  the  Bangkapi  district  of  Bangkok,Thailand.  The  hospital  is  located  about  half  way  between  Suvarnabhumi  InternationalAirport and Bangkok city. The hospital, established in 1994, is a JCI-accredited hospitalthat treats more than 300,000 patients from 40 countries every year. In 2011, it recordeda revenue of THB1.385bn (RM138m) and net profit of THB57.8m (RM5.78m).

Tapping into Thai healthcare sector. We are not surprised with the acquisition as we are well aware that KPJ has been actively looking for acquisition targets in Thailand. The consideration price is based on 9x FY12 EV/EBITDA, which we deem fair and attractive as the listed Thai hospital companies under our coverage are currently trading at above 12x EV/EBITDA. While the earnings accretion from the acquisition is relatively small, we view  it  positively  as  it  will  enable KPJ to penetrate into Thailand’s fast growing private healthcare  sector,  driven  by  domestic  demand  as  well  as  medical  tourism.  During9MFY12,  the  Thai  hospital  companies  under  our  coverage recorded  on  average  >20% revenue growth y-o-y and net profit growth of more than 30%, driven by robust domestic demand and strong growth in the medical tourism sector. We gather that in 2011, about 43% of Vejthani Hospital’s revenue came from international patients,  mostly  from  the Middle East,  such  as  from  the  UAE  and  Oman.  The  hospital  also  has  international offices and representatives in Myanmar, Bangladesh, Nepal, Australia, Qatar and a few other  countries.  We  believe  that  KPJ will be able to leverage on Vejthani’s sizeable international network to boost the group’s medical tourism business in Malaysia.  

Maintain Buy, FV RM7.15. Following the acquisition, VPCL will become an associate of KPJ. As far as the preference shares go, KPJ is entitled to receive an annual dividend of THB0.75  per  preference  share,  as  well  as  rights  to  proportionate  dividend  as  ordinary shareholder  for  the  remaining  dividends.  VPCL  has  a  policy  of  paying  out  a  minimum dividend of 40%. Nevertheless, we maintain our forecast at this juncture. We also keep our  Buy  call  on  KPJ,  at  an  unchanged  FV  of  RM7.15,  based  on  a  28x  PER  on  FY13 EPS.

Source: OSK