KPJ Healthcare - Sustaining positive long-term growth

-  Following a company visit, we are re-initiating a BUY recommendation on KPJ Healthcare (KPJ), with a fair value of RM6.90/share, based on a 15% discount to our DCF value to FY13F. Our BUY recommendation is premised on:-

(1) For this year, KPJ is set to have additional 520 beds, underpinned by four hospitals – Sabah Specialist, Pasir Gudang Specialist, Maharani Specialist and Sri Manjung Specialist. 

(2) Positively enough, medium-term growth hinges on a further 840 beds at five new hospitals, which are anticipated to be completed by FY15F. 

(3) Nevertheless, we continue to expect organic growth from existing hospitals. As it is, four existing hospitals are undergoing expansion, bringing additional circa 390 beds by FY15F.

-  On the back of the longer gestation period for the new hospitals, coupled with high operating cost, we forecast FY12F earnings to rise by a marginal 1.4% to RM146mil. Subsequently, earnings are estimated to rise by a decent 10% to RM161mil in FY13F, followed by RM176mil thereafter. 

-  The acquisition of the Vejthani hospital, Thailand, is expected to be completed by 2QFY13.  Vejthani, which focuses on medical tourism, will enable KPJ to leverage on information and knowledge in medical tourism – presenting it with a great opportunity to grow medical tourism in Malaysia. Having said, KPJ is cementing its presence in Johor via three upcoming hospitals, particularly for Bandar Dato Onn, which is slated to be the medical tourism hub. More importantly, this acquisition has further strengthened KPJ’s footprint within the healthcare industry in Southeast Asia, in addition to its presence in Indonesia and Australia.

-  Following the success in Jeta Gardens, management plans to duplicate a similar facility in Malaysia. The conversion of the old KPJ Tawakkal Specialist Hospital into a small-scale aged care centre is underway. Over the long run, should this be well-accepted by the local communities, this will act as a new revenue stream. Conversely, Jeta Gardens’ expansion for an additional 70 beds for the aged-care facility is also underway.

-  Aided by the group’s asset light model, we are not surprised if asset injections into Al’-Aqar REIT (Al-Aqar Mk Equity, HOLD) are likely to materialise this year, underpinned by the near completion and completion of some hospitals. In line with guidance of a dividend payout of 50% of earnings, we project dividend yields of 2.3% and 2.5% for FY12F and FY13F, respectively. 

-  Underpinned by a step-up in bed capacities from a fleet of eight new hospitals for FY13F-FY15F, earnings momentum is estimated to accelerate by a FY12F/FY15F 3-year CAGR of 11%. We continue to like KPJ’s dominant position in Malaysia (19% market share) and long-term growth potential via greenfield projects, acquisition and expansion of existing hospitals. Hence, we have an upside bias on the stock underpinned by potential return of 22%.

-  At the current level, KPJ’s fully-diluted PE stands at 21x of FY13F, within its historical 5-year PE band. Forward valuation is attractive compared with its regional peers’ average PE of 23x and more importantly, at a huge discount of 76% to IHH Healthcare’s PE of 37x. Thus, we view KPJ as a cheaper proxy to the growing healthcare industry sector.  

Source: AmeSecurities