Hot Stock KPJ top loser after ordered to pay RM71m in lawsuit

Hot Stock KPJ top loser after ordered to pay RM71m in lawsuit
Business & Markets 2013
Written by Kamarul Anwar of theedgemalaysia.com
Monday, 29 July 2013 11:46

KUALA LUMPUR (July 29): KPJ Healthcare Bhd was the biggest decliner on the local bourse in the mid-morning trade after Alliance Research downgraded the hospital operator’s stock to a “sell” after KPJ was ordered in a court ruling to pay damages worth RM70.6 million to Hospital Penawar Sdn Bhd.

At 10:37 am, KPJ fell 54 sen or 7.45% to RM6.71 with 2.34 million shares transacted. The counter had a trading volume of RM6.68 and RM7.18.

In a note today, Alliance analysts Cheah King Yoong and Tan Kee Hoong said KPJ’s share price run-up had resulted in a rich price-earnings ratio valuation of 28.7 times and 27.6 times for its financial years ending December 31, 2013 (FY13) and 2014 (FY14).

Bloomberg data showed the healthcare provider’s stock rose 86 sen or 13.23% between May 31 and July 25 to RM7.36, which is its all-time high.

“We believe this is unjustified given its 1) high implied price-to-earnings-to-growth ratio of 1.9 times despite a 15.1% three-year earnings compound annual growth rate, and 2) potential risk of earnings disappointment due to longer-than-expected gestation period for new hospitals,” said the analysts in the note.

This led to Alliance’s Cheah and Tan to downgrade KPJ to a “sell” from “neutral”. However, its target price was raised to RM6.30, from RM6.07 previously.

The analysts also said there could be downside risks to KPJ’s dividends, given that it traditionally pays out about 50% of its net profit as dividends, and it will incur rising capital expenditures for new hospitals in the coming years.

KPJ’s dividends are under threat after the group announced that the Johor Bahru High Court has ordered the former to pay a sum of RM70.6 million to Hospital Penawar for the breach of an agreement signed in May 1995.

"The sum awarded represents 43.8% of our FY13 core net profit estimates," Cheah and Tan wrote.

The lawsuit was filed after KPJ decided to build a hospital in Pasir Gudang within Hospital Penawar’s vicinity, which the plaintiffs claimed was in breach of the agreement.

“Having said that, we believe that KPJ’s long term outlook remains intact as this is a non-recurring event and the High Court did not order any specific performance as restitution for the plaintiffs,” Cheah and Tan wrote.

Also, the Alliance analysts said it retains their dividends estimates for now pending clarification with KPJ’s management but they “foresee downside risks”.