Bonus and rights issue to fund expansion plans _KPJ

Bonus and rights issue to fund expansion plans
Business & Markets 2013
Written by TA Securities
Wednesday, 31 July 2013 09:47

KPJ HEALTHCARE BHD []
(July 30, RM6.73)
Maintain sell at RM6.72 with a new fair value of RM7.14: On Monday, KPJ had announced a one-for-two bonus issue of up to 329,766,487 new ordinary shares of 50 sen each. The entitlement date, it said, will be determined later. It also announced a 1-for-15 rights issue of up to 43,968,866 KPJ shares at an indicative issue price of RM2.80 per rights share. This will include up to 87,937,732 free detachable warrants on the basis of two new warrants for every rights share subscribed. Yet to be determined, the illustrated price of the warrants is RM4.77. The bonus shares will not be entitled to participate in the proposed rights issue.

The bulk of the proceeds will be utilised for the CONSTRUCTION [] of the KPJ Bandar Dato’ Onn Specialist Hospital in Johor Baru. Construction work is expected to commence this year while completion is slated for 2016.

Phase 1 of the hospital will have a bed capacity of 150 with a total development cost of approximately RM250 million.

Meanwhile, RM35 million from the proposed issue will be used to repay part of total borrowings which stands at approximately RM627 million as at July 11, 2013. The remainder will be used to fund day-to-day operations.

The proposed issue will provide KPJ with the funds necessary to continue with its existing expansion plans. KPJ has also been ordered to pay RM70.4 million to Hospital Penawar due to a breach in their joint venture agreement.

We make the following changes to our model: (i) Impute changes resulting from bonus and rights issue. As of now, we will not account for the warrants as the exercise price has not been given; (ii) Change of target completion date for KPJ Bandar Dato’ Onn Specialist Hospital from 2014 financial year (FY14) to FY16. For this reason, we revise our estimated FY13, FY14 and FY15 reported net profit to RM61.8 million, RM123 million and RM127.4 million respectively from RM59.9 million, RM124.2 million and RM143.3 million respectively.

Based on our estimates, there will be earnings dilution of 3.2% after incorporating the increase in interest income and outstanding shares post-rights issue.

Following the proposed bonus and rights issue, along with adjustment to our earnings, our new target price for KPJ is RM7.14 (ex-all: RM4.65). This represents a total potential upside of 7.6%.

That said, we maintain our “sell” recommendation on KPJ. Key buying/selling points include: (i) KPJ being the largest healthcare provider in Malaysia; (ii) expansion plan fuelled by Economic Transformation Programme projects over the next few years; and (iii) longer than expected gestation period. — TA Securities, July 30


This article first appeared in The Edge Financial Daily, on July 31, 2013.