KPJ in transition for next phase of growth

by **Cals** Fri 27 Dec 2013, 16:31

Business & Markets 2013

Written by AmResearch

Friday, 27 December 2013 10:02

KPJ Healthcare Bhd
(Dec 24, RM3.95)
Maintain hold at RM4.05 with a fair value of RM3.85: We reaffirm our “hold” recommendation on KPJ with a revised ex-all fair value of RM3.85 per share (versus RM6.00 previously), based on our discounted cash flow valuation, following an enlarged share base from its corporate exercise.

The corporate exercise includes: (i) 1-for-2 bonus issue of up to 330 million shares; (ii) 1-for-15 renounceable rights issue of up to 44 million shares at an exercise price of RM2.80 per share; and (iii) detachable warrants per rights issue of up to 88 million warrants at an exercise price of RM4.01 per warrant.

The bonus and rights issue will increase its share base by about 60% to one billion. The rights proceeds of RM123 million will be used for the construction of the KPJ Bandar Dato’ Onn Specialist Hospital in Johor Baru (65%), debt repayment (28%) and as working capital (4%).

A full conversion of the warrants will increase KPJ’s share base by 9% to 1.1 billion. As the exercise period of the warrants is for five years, the impact of the dilution will not be immediate.

KPJ will raise proceeds of RM353 million if all of the warrants are to be converted. This will help to fund future capacity expansion given eight new hospitals by financial year 2016 ending Dec 31 (FY16) with more than 1,500 beds coming onstream once they are fully operational. As at end of third quarter of FY13, the group had cash of RM236 million.

While new hospitals will be the key earnings driver, earnings per share growth is expected to be flat at about 4% in the next few years as a result of start-up losses from the new hospitals, with stronger earnings visibility expected in FY16F.

Gearing is expected to decrease to 0.3 times in FY14F from 0.5 times in FY13F due to the rights proceeds.

Although KPJ is well-positioned to ride on the growing domestic private healthcare sector and ageing population,its earnings weakness is vulnerable to the potential longer than expected gestation period for new hospitals, which typically is three to five years.

At the current level, the stock is trading at fully-diluted 44 times price-earnings ratio of FY14F, above its historical peak of 34 times. — AmResearch, Dec 24

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This article first appeared in The Edge Financial Daily, on December 27, 2013.