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KPJ's expansion plans on course


Maintain outperform at RM4.63 with revised fair value of RM5.30 (from RM5.62): KPJ plans to develop its existing network of hospitals into sub-specialist hospitals (or centres of excellence) which will be equipped with specialised equipment and house medical specialists. We view this positively as KPJ will only need to equip the identified hospitals with the required medical equipment/facilities.

New hospitals in the pipeline include a 200-bed hospital in Bandar Baru Klang, Selangor, the 250-bed new Sabah Medical Centre, a 120-bed hospital in Muar and a 120-bed hospital in Pasir Gudang, Johor, a 200-bed hospital in Tanjung Lumpur, Pahang, and the KPJ Perlis Specialist Hospital.

The National Health Insurance Scheme is not expected to have a significant impact on KPJ. Longer-term growth will be driven by the opening or acquisition of new hospitals and government initiatives in growing healthcare tourism.

KPJ REIT complements KPJ’s growth plans. Having completed three tranches of asset injection into KPJ REIT, the company’s fourth asset injection is on course. We are positive on KPJ’s growth strategies, as we believe the asset injection strategy will support the company’s expansion plans.

We have tweaked our FY11 ito FY13 earnings forecasts to adjust for: (i) changes in revenue mix assumptions to account for a higher number of in patients; and (ii) increase in our depreciation assumptions of 37.1% to 64.4% for FY11 to FY13 for the construction of new hospitals. All in, our earnings forecasts are reduced by 5.6% to 10.4% per year for FY11 to FY13.

The risks include lower than expected patient numbers if there is slower than expected economic recovery or a serious disease outbreak (such as SARS or swine flu) in Malaysia. A slower than expected turnaround in loss-making hospitals would also be a drag on earnings growth.

Given our lowered earnings forecasts, our fair value is reduced to RM5.30 (from RM5.62 previously) based on an unchanged target FY12 price-earnings ratio of 19 times, after imputing a 10% discount to the regional peers’ average of 21.5 times. Moving forward, however, we believe the stock is still attractive amid the current market volatility given the defensive qualities of the healthcare industry as well as the decent dividend yields. We therefore reiterate our "outperform" call on the stock. RHB Research, Aug 2