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PP 7767/09/2010(025354)

10 March 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New s Upda te 10 March 2010


MARKET DATELINE

Share Price : RM2.57


KPJ Healthcare Fair Value
Recom
:
:
RM3.20
Outperform
Injecting Another Three Hospitals Into KPJ REIT (Maintained)

Table 1: Investment Statistics ( KPJ; 5878 ) Bloomberg Ticker: KPJ MK


FYE Dec Revenue Net Profit EPS Growth PER C.EPS* P/NTA Net gearing ROE Gr. Div.
(RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (x) Yld. (%)
2009a^ 1446.4 98.8 18.7 15.3 13.7 - 2.7 0.4 15.9 4.7
2010f^ 1602.4 115.6 21.9 17.1 11.7 20.0 2.2 0.4 15.7 5.4
2011f 1778.3 122.6 23.2 6.0 11.1 21.0 1.8 0.3 14.3 6.2
2012f 1972.1 145.1 27.5 18.3 9.3 27.0 1.5 0.3 14.4 7.0
Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC * Consensus based on IBES Estimates
^ Core net profit

♦ Selling of three hospital buildings to KPJ REIT. KPJ is selling off three Issued Capital (m shares) 527.6
hospital buildings i.e. RS Bumi Serpong Damai, Kluang Utama Specialist Market Cap(RMm) 1373.9
Daily Trading Vol (m shs) 0.9
Hospital and Bandar Baru Klang Specialist Hospital to Al-Aqar KPJ REIT (KPJ
52wk Price Range (RM) 0.93-2.61
REIT) for RM138.8m to be satisfied with RM83.3m cash and 56.6m new units
Major Shareholders: (%)
in KPJ REIT at an issue price of RM0.98 and a 5.8% discount to its NAV of Johor Corporation 50.2
RM1.04 as at 25 Feb 10. Kumpulan Waqaf An-Nur 8.8
Lembaga Tabung Haji 5.1
♦ The transaction will:
FYE Dec FY10 FY11 FY12
1. Result in a one-off gain of RM3.36m or an earnings improvement by 2.9%
EPS chg (%) 0.2 0.3 0.3
to the revised net profit forecast. Var to Cons (%) 9.6 10.7 1.8

2. Increase KPJ’s stake in KPJ REIT from 301.4m units or 42.8% (after the
PE Band Chart
completion on acquisition of Tawakal Hospital) to 358.1m units of 50.9%;
and
PER = 11x
PER = 9x
3. Reduce KPJ’s net debt and gearing from RM222.7m and 0.36x as at Dec PER = 7x
09 to RM142.7m and 0.23x.

♦ Unlocking asset value. We are positive on KPJ’s latest move as it is


consistent with its strategy to continuously “recycle” its capital to drive
growth, i.e. to partially cash out while maintaining control of its hospital
assets by injecting them into KPJ REIT, and ploughing back the cash to fund Relative Performance To FBM KLCI
further acquisitions. We also think that the transaction price for the three
hospital buildings is fair given that it is transacted at market value according
KPJ Healthcare
to PT Penilai / Collier International.

♦ Forecasts. We tweaked our earnings forecasts up by 0.2-0.3% for FY10-12


to reflect interest and depreciation savings and higher associate contributions, FBM KLCI

which would more than offset the increase in rental expense. We do not factor
the RM3.36m one-off gain in our forecast as it is an EI.

♦ Risks. KPJ’s earnings are vulnerable to any serious disease outbreak in


Malaysia such as SARS or swine flu, as the infected patients will have to be
separated and admitted to government-appointed specialised hospitals.

♦ Investment case. We maintain our Outperform call on KPJ with fair value of
RM3.20 based on 14.5x FY12/10 EPS, in line with our 14.5x target PE for the
consumer sector. We like KPJ as: 1) valuations remain lower than the regional Hoe Lee Leng
peers average PER of 17x; and 2) rising affluence and higher take-up of (603) 92802239
hoe.lee.leng@rhb.com.my
insurance policies in Malaysia. Our target PE is on the high end of its historical
5-year PE band of between 5-15x.

Please read important disclosures at the end of this report. Page 1 of 2

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10 March 2010

Table 2. Earnings Forecasts Table 3. Forecast Assumptions


FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 1446.4 1602.4 1778.3 1972.1 No. of hospitals 21 23 25


Turnover growth (%) 14.1 10.8 11.0 10.9 No of in-patients 237,512 258,888 282,188
No. of out-patients 2,238,989 2,373,328 2,515,728
Cost of Sales (1025.9) (1137.7) (1262.6) (1400.2)
Gross Profit 420.4 464.7 515.7 571.9

EBITDA 185.0 202.0 223.2 259.8


EBITDA margin (%) 12.8 12.6 12.6 13.2

Depreciation (46.5) (48.6) (58.1) (57.4)


Net Interest (16.6) (13.7) (13.6) (14.2)
Associates 20.1 28.8 30.7 30.7

Pretax Profit 142.0 168.5 182.3 218.9


Tax (34.2) (42.1) (47.4) (59.1)
Minorities (5.9) (10.8) (12.3) (14.7)
Net Profit 98.8 115.6 122.6 145.1

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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