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KPJ Healthcare still on the growth track

Despite the strong top line growth, KPJ expects a slight slowdown in profit before tax growth largely due to slower yield growth at its new hospitals Tawakkal Specialist Hospital, Penang Specialist Ho

21-11-2011

Maintain our buy at RM4.21 with fair value of RM5.21: Despite the strong top line growth, KPJ expects a slight slowdown in profit before tax growth largely due to slower yield growth at its new hospitals Tawakkal Specialist Hospital, Penang Specialist Hospital and Bumi Serpong Damai (BSD) in Jakarta.

Generally, KPJ’s new hospitals do not operate at full capacity at the start of operation as the group reserves some floors for future expansion. With Tawakkal and Penang Specialist having reached their maximum occupancy rates, the limited bed capacity resulted in slower yield growth, with the rise in revenue lagging the increase in costs.

Given the high fixed cost nature of the business and in order to improve yields, both hospitals have embarked on capacity expansion by opening new wards to reach optimum operating capacity. BSD is expected to remain in the red for at least a few more years as it is still in the early phase of gestation. Nevertheless, KPJ expects BSD’s financial performance to improve as it captures a bigger market share in Jakarta.

With construction of Bandar Baru Klang Specialist Hospital completed recently, the hospital is expected to start operation by 1QFY12 pending further approvals from the authorities. KPJ has four new hospitals under construction currently while construction on another three is expected to start next year.

The group’s ongoing expansion will enable it to strengthen its position as the leading private healthcare services provider in Malaysia as well as tap the underserved markets where private healthcare is in high demand. We believe that the innovative use of the REIT as a vehicle to recycle its capital will allow KPJ to sustain its growth momentum without stretching its balance sheet.

Based on management’s guidance, we are raising our revenue forecast for FY11 by 2.2%. That said, we are trimming our net profit forecast by 1.2% after factoring in higher operating costs although our FY12 forecast stays. We maintain our "buy" rating at an unchanged fair value of RM5.21, based on 19.6 times priceearnings ratio on FY12 eamings per share. KPJ is excellent for long-term investment and portfolio balancing. OSKResearch. Nov 18







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