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PP 7767/09/2010(025354)

Malaysia

MARKET DATELINE

PP 7767/09/2010(025354) Mala y sia MARKET DATELINE Corporate Highlights Visit Note KPJ Healthcare Brighter Prospects Ahead

Corporate Highlights

Visit Note

KPJ Healthcare

Brighter Prospects Ahead

17 June 2010
17 June 2010

RHB Research Institute Sdn Bhd A member of the RHB Banking Group

Company No: 233327 -M

 

17 June 2010

Share Price

:

RM3.29

Fair Value

:

RM4.25

Recom

:

Outperform

 

(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

GDY

(RMm)

(RMm)

(sen)

(%)

(x)

(sen)

(x)

(x)

(%)

(%)

2009a

1,456.4

110.9

21.0

29.5

15.7

-

3.4

0.4

17.5

3.6

2010f

1,675.5

126.9

24.0

14.1

13.7

21.0

2.7

0.3

16.7

4.3

2011f

1,861.3

140.5

26.6

10.7

12.4

23.0

2.2

0.3

15.6

4.9

2012f

2,065.4

157.6

29.8

12.2

11.0

26.0

1.8

0.2

14.9

5.5

Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC

 

* Consensus based on IBES Estimates

 

Revenue growth drivers. For FY09, KPJ recorded a revenue growth of

 

Issued Capital (m shares) Market Cap (RMm)

529.6

14.9% yoy largely due to higher contribution

from all

of its business

1,742.5

segments. Moving forward, we believe KPJ’s revenue growth drivers include:

Daily Trading Vol (m shs)

1.1

o

The opening of at least two new hospitals p.a.;

 

52wk Price Range (RM)

1.16-3.39

o

Expansion of its existing hospitals;

Major Shareholders:

(%)

o

Enhancing its presence in medical tourism; and

Johor Corporation

50.2

o

Higher utilisation rate per patient.

Kumpulan Waqaf An-Nur

8.8

 

Lembaga Tabung Haji

5.1

Capex of RM200m p.a

We understand that KPJ is investing RM200m to

build three new hospitals, purchasing of new medical equipment and expanding its existing hospitals nationwide this year. The construction works for its three new hospitals which are located in Bandar Baru Klang, Pasir Gudang and Muar have already started and are due for completion by end of 2011. We believe this is in line with the management’s targets to open at least two new hospitals p.a. either through greenfield projects or acquisition of established hospitals, which would likely be in East Malaysia, East Coast or Iskandar region.

Stronger foothold in medical tourism. In FY09, over 15,000 foreigners received treatment at its hospitals and in the 1QFY10, KPJ received more than 5,000 foreigners of which 2,800 were Indonesians. Although KPJ’s focus on positioning itself as a community healthcare provider still remains, the company realises that there is sizeable growth potential in medical tourism. However, management mentioned that any significant contribution from medical tourism would only come in 3-5 years’ time. Currently, medical tourism accounts for less than 10% of total group revenue.

Forecasts. We have revised up our FY10-12 earnings forecasts by 9.7- 14.3% largely to reflect the upward change in our revenue assumptions, and lower effective tax rate and MI assumptions.

Risks. The risks to KPJ’s earnings include lower-than-expected patient numbers, which could be due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as slower-than-expected turnaround in loss-making hospitals.

FYE Dec EPS chg (%)

FY10

FY11

FY12

9.7

14.3

8.2

Var to Cons (%)

14.2

15.5

14.6

PE Band Chart

PER = 11x PER = 9x PER = 7x
PER = 11x
PER = 9x
PER = 7x

Relative Performance To FBM KLCI

KPJ Healthcare FBM KLCI
KPJ Healthcare
FBM KLCI

Investment case. Besides the earnings revision above, our indicative fair value has been raised to RM4.25 (from RM3.50) based on target FY11 PER of 16x (10% discount to regional peers’ average) as we roll forward our valuation year (from FY10). We believe the M&A activity in the healthcare sector recently supports our view that there is significant growth potential for the sector in the region. We continue to like KPJ for its leading position and its expansion plans in Malaysia’s growing healthcare market. We reiterate our Outperform call on the stock.

Yap Huey Chiang (603) 92802179 yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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Page 1 of 5

Key Takeaways From Visit 17 June 2010 ♦ Revenue growth drivers. For FY09, KPJ recorded

Key Takeaways From Visit

17 June 2010

Revenue growth drivers. For FY09, KPJ recorded a revenue growth of 14.9% yoy largely due to higher

contribution from all of its business segments. Moving forward, we believe KPJ’s revenue growth drivers include:

o The opening of at least two new hospitals p.a.; o Expansion of its existing
o
The opening of at least two new hospitals p.a.;
o
Expansion of its existing hospitals;
o
Enhancing its presence in medical tourism; and
o
Higher utilisation rate per patient.
Chart 2. Number of outpatients and inpatients from 2004-
Chart 1. Breakdown of KPJ’s revenue from 2004-2009
2009
RM('000)
600
Number of patients
2500000
500
2000000
400
1500000
300
1000000
200
500000
100
0
2004
2005
2006
2007
2008
2009
0
2004
2005
2006
2007
2008
2009
No of outpatients
No of inpatients
Hospit al income
Consult at ion income
Sale of pharm, medical & surgical product s
Lab t est f ees
Ot her hospit al income

Source: Company data, RHBRI

Capex of RM200m p.a

We understand that KPJ is investing RM200m to build three new hospitals, purchasing

of new medical equipment and expanding its existing hospitals nationwide this year. The construction works for its three new hospitals which are located in Bandar Baru Klang, Pasir Gudang and Muar have already started and are due for completion by end of 2011. Meanwhile, the greenfield Tanjung Lumpur, Kuantan hospital is set to start operations in 2012. We believe this is in line with the management’s targets to open at least two new hospitals p.a. either through greenfield projects or acquisition of established hospitals, which would likely be in East Malaysia, East Coast or Iskandar region.

Updates on expansion of its existing hospitals. Management mentioned that the recently-opened Penang Specialist hospital in Aug ’09 to replace Bukit Mertajam Specialist Hospital, is doing well. The hospital is currently running at a maximum occupancy rate (vs. average occupancy rate of 65-70% for KPJ’s other hospitals). It has the capacity of slightly more than 200 beds and management is looking to add more beds progressively. Meanwhile, KPJ’s replacement Tawakal Specialist hospital, is set to be opened next month, with a capacity of about 200 beds while the old hospital building (which has 140 beds) would be used as a day care centre, covering a number of services including dialysis, eye/dental care and day surgeries. KPJ is also looking at expanding the capacity of its top performing hospitals i.e. Ampang Puteri and Damansara Specialist by 100 beds (or +46% to be completed by 2012) and 60 beds (or +44% to be completed by end 2011) respectively.

Stronger foothold in medical tourism. In FY09, over 15,000 foreigners received treatment at its hospitals (vs. 18,000 in FY08) and in 1QFY10, KPJ received more than 5,000 foreigners of which 2,800 were Indonesians. Although KPJ’s focus on positioning itself as a community healthcare provider still remains, the company realises that there is sizeable growth potential in medical tourism. KPJ has identified four hospitals, namely Damansara Specialist, Ampang Puteri Specialist, Ipoh Specialist and Johor Specialist, as the flagship hospitals for its medical tourism segment, and as highlighted above the company is looking to expand the capacity of its top performing hospitals i.e. Ampang Puteri and Damansara Specialist. We understand that these extensions would include more premium wards to push for the medical tourism business. Management mentioned that any significant contribution from the medical tourism would only come in 3-5 years’ time. Currently, medical tourism only accounts for less than 10% of total group revenue.

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17 June 2010 ♦ Expecting higher utilisation rate per patient. KPJ saw the utilisation rate

17 June 2010

Expecting higher utilisation rate per patient. KPJ saw the utilisation rate per patient improved to 67% in FY09 from 59% in FY08 and explained that the higher uptake of medical insurance policies in Malaysia as well as greater health awareness has led to stronger revenue/patient and this is expected to remain strong moving forward. We note that the company is beginning to invest in new state-of-the-art equipment in its Klang Valley hospitals where there is demand for higher-end services. We believe as Malaysia moves to a higher income level, supported by growth in the credit business (i.e. clients with their own or companies health insurance plans), demand for these higher-end healthcare services should rise accordingly, which will bolster KPJ’s profit margins.

Risks

Risks to our view. The risks to KPJ’s earnings include lower-than-expected patient numbers, which could be due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as slower-than-expected turnaround in loss-making hospitals.

Forecasts and Recommendation

Forecasts raised. We have revised up our FY10-12 revenue projections by 4.6-4.7% following the upward change in FY10-12 assumptions for number of outpatients and inpatients by 1.4-1.5% respectively, and higher utilisation rate per patient of 68-73% (vs. 64-70% previously). At the same time we have lowered our FY10-12 effective tax rate assumption to 25% p.a. (vs. FY10-12 effective tax rate of 25-27% previously) and lowered our FY10-12 MI contribution by 6.7-7.3% to factor in the lower minority interest following the full acquisition of Penang Specialist Hospital in May ’10. Consequently, our FY10-12 earnings forecasts have been raised by 9.7- 14.3% p.a. respectively.

Higher fair value. Besides the earnings revision above, our indicative fair value has been raised to RM4.25 (from RM3.50) based on target FY11 PER of 16x (10% discount to regional peers’ average) as we roll forward our valuation year (from FY10). KPJ’s share price has outperformed the FBM KLCI by 22% YTD and by 7.7% since we upgraded the stock on 7 Jun. Furthermore, the M&A activity in the healthcare sector recently, which includes Khazanah Nasional’s proposed partial general offer for Singapore-listed Parkway Holdings’ shares and the takeover bids for Australia-listed Healthscope by private equity groups and US-based healthcare companies, has resulted in valuations moving higher. This supports our view that there is significant growth potential for the healthcare sector in the region. We continue to like KPJ for its leading position and its expansion plans in Malaysia’s growing healthcare market. We reiterate our Outperform call on the stock.

Table 2. Earnings Forecasts

Table 3. Forecast Assumptions

FYE Dec (RMm)

FY09a

FY10F

FY11F

FY12F

FYE Dec

FY10F

FY11F

FY12F

Turnover

1,456.4

1,675.5

1,861.3

2,065.4

No. of hospitals

21

23

25

Turnover growth (%)

14.9

15.0

11.1

11.0

No. of beds

2,363

2,646

2,911

 

No of in-patients

237,943

259,358

282,700

Gross Profit

419.1

485.9

539.8

599.0

No. of out-patients

2,275,469

2,411,998

2,556,717

 

EV/bed (in RM)

97,326

86,898

78,998

EBITDA

188.3

217.0

241.7

264.5

EBITDA/bed (in RM)

91,846

91,330

90,891

EBITDA margin (%)

12.9

13.0

13.0

12.8

Source: Company data, RHBRI estimates

 

Depreciation

(46.5)

(48.6)

(55.1)

(52.9)

Net Interest

(16.7)

(14.1)

(13.6)

(13.8)

Associates

18.9

28.8

30.7

30.7

Pretax Profit

143.9

183.1

203.7

228.5

Tax

(29.2)

(45.8)

(50.9)

(57.1)

Minorities

(3.9)

(10.5)

(12.3)

(13.8)

Net Profit

110.9

126.9

140.5

157.6

Source: Company data, RHBRI estimates

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Page 3 of 5

17 June 2010 Chart 1: KPJ Technical View Point ♦ The share price of KPJ

17 June 2010

Chart 1: KPJ Technical View Point

17 June 2010 Chart 1: KPJ Technical View Point ♦ The share price of KPJ has

The share price of KPJ has been trading at above the UTL since Aug 2009.

In a consolidation phase in Jan 2010, the stock combed along the UTL before triggering a smooth recovery leg to a high of RM3.10 in Apr.

However, a stiff profit-taking momentum had pressed the stock towards the UTL support region near RM2.70 – RM2.88, which was slightly off the supportive UTL near RM2.88.

But, as it managed to sustain at above RM2.70, it launched a technical rebound in late May and recaptured the UTL, before removing the key hurdle of RM3.10 in early Jun.

It registered its third positive candle in a row yesterday, with an upbeat momentum reading on

the board, to suggest further upside potential to the RM3.60 target resistance level from the previous consolidation phase from Apr to May

2010.

In case of a sudden reemergence of profit-taking pressure, the stock may retract to the 10-day SMA near RM3.13 and the UTL near RM3.00, before it could threaten the current uptrend, in our view.

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

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17 June 2010 Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by

17 June 2010

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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