KPJ Healthcare - Margin pressure from start-up losses of new hospitals HOLD

- We downgrade KPJ Healthcare to a HOLD, with a lower fair value of RM6.47/share vs. RM6.90/share previously, based on our DCF valuation following a fine-tuning of our forecasts.

- KPJ’s FY12 net profit of RM139mil was largely within expectations coming in at 96% of our, and consensus, estimates. No dividend was declared for the quarter. Total FY12 dividends amounted to 7.5 sen/share (DPS: 7.5 sen for FY11), which translates into payout ratio of 32%.

- Revenue (+11% YoY) for the year was largely driven by:- (1) Increased revenue of existing hospital and newly-opened hospitals in Malaysia; (2) An increase of patient volume in Indonesia; and (3) Revenue contribution from Jeta Gardens (acquired 30 November 2011).

- However, FY12 earnings slipped 3% due to start-up losses contributed by newly-opened hospitals. EBITDA margin compressed to 11.6% from 12.1% from FY11. Recognition of accumulated fair value adjustment in relation to investment properties of an associate, led to PBT declining by 36% YoY.

- Given start-up losses arising from the newly-opened hospitals, margin pressure is expected to continue from the long gestation period (average 3-5 years) for the new hospitals. EBITDA is estimated to be flattish at 11%.

- Post fine-tuning, we expect any earnings lift to continue from a stepup in bed capacity. FY13F earnings are estimated to expand 4%, driven by additional 213 beds (+8%). The earnings growth trajectory remains intact for FY14F-FY15F, at 6%-10%, steered by +420 beds (+15%) and +217beds (+7%), respectively.

- The number of beds totalled 2,694 in FY12. In tandem with its expansion plan, we expect 2,907 beds by end-FY13F – Sri Manjung Specialist (expected completion in 1Q), Sabah Specialist, Pasir Gudang and Maharani Specialist – increasing to 24 hospitals from 21 in Malaysia.

- Beyond FY15F, management plans to further enhance the group’s presence in Sabah and Sarawak.

- In light of maintaining an asset-light model, discussions are on-going with Al’-Aqar REIT (Al-Aqar Mk Equity, HOLD), in view of completed or near-completion of hospitals.

- Nonetheless, we are still positive of KPJ underpinned by:- (1) Domestic lion share (19%) and leading beneficiary to the Malaysia’s healthcare spending; and (2) Transparent growth potential stemming from greenfields, acquisitions and expansion of existing hospitals, given a well-mapped expansion plan.

- Over the past one year, the share price has risen by 24% and outperformed KLCI by 17%. We believe earnings growth has been priced in. The stock trades at an implied EV/EBITDA of 12x, at a 25% discount to regional peers’ average. KPJ’s FY13F 24x PE is at a >100% discount to IHH Healthcare’s (IHH Mk Equity, HOLD).

Source: AmeSecurities