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KPJ still attractive compared to its peers

Malaysian Reserve


Recommendation: Maintain Trading Buy TARGET Price: RM4.60 by MIDF Research (May 23) Investment Highlights STELLAR performance. KPJ Heaithcare Bhd pre-tax profit grew +9.2% YoY to RM41.6m in 1QFYI1. The commendable resuit was also driven by higher contribution (+27.9% YoY) from KPJs associate company, namely Ai-Aqar KPJ REIT. Excluding RM2.2m losses from its Indonesia operation, which we believe was due to the newly opened RS Bumi Serpong Damai hospital last year in Jakarta, KPJ’s earnings growth is expected to he higher. Gestation period of 2-3 years for a new hospital is a norm. EPS was however -3.8% YoY lower to 4.6 sen due to dilution on warrants conversion, accounting for 20.2% and 18% respectively of our and consensus numbers. We are expecting higher contribution in the following three quarters. We also expect future earnings growth driven by continuous expansion and rising private healthcare demand to offset the dilution. We are maintaining our FY11 and FY12 earnings forecast. Continuous expansions to spur growth. KPJ opened two new hospitals, Tawakkal Hospital and RS Bumi Serpong Damai in FY10. Revenue growth rate of +16.4% YoY or +1.0% QoQ was well in line with management expectation of +10% to +15% growth per annum or RM2b revenue target in 2012. We expect Bandar Baru Klang Specialist Hospital, Pasir Gudang Specialist Hospital (120 beds), Muar Specialist Hospital (120 beds) and another one in Kuantan, Pahang (120 beds) to make their maiden revenue contribution by end of 2011 or early 2012. Furthermore, acquisition of Sibu Specialist Medical Centre was completed on April 11. A first interim dividend of 2.3 sen per share net (consists of 0.4 sen gross and two sen single tier) was declared with ex-date and payable date on June 28 and July 29, 2011 respectively. Net dividend yield is estimated at 2.8% and 3J0 respectively for FY11 and FY12. Maintain Trading Buy’ with unchanged TP of RM4.60. Valuation wise, KPJ is still attractive compared to its peers 17x-27x PER. We value KPJ at 18x PERI2, which is at the highend of its historical PER band. Given KPJ’s track record of +18.8c and 30.1c 5-year revenue and net earnings CAGR respectively, we have faith in management’s ability to execute well its strategy of adding one or two new hospitals each year. Besides, management is looking for potential venture into countries such as Vietnam, Cambodia and Myanmar in order to drive the company’s future growth and enhance its brand name regionally