Stock Name: KPJ
Company Name: KPJ HEALTHCARE BHD
Research House: OSK
KPJ Healthcare Bhd
(Sept 23, RM3.27)
Maintain buy at RM3.36 with target price of RM4.62: KPJ announced to Bursa Malaysia on Wednesday that its wholly-owned subsidiary, Kumpulan Perubatan (Johor) SB (KPJSB), has entered into subscription deeds to acquire up to 51% equity interest in Jeta Gardens Waterford Trust (JGWT) for a total consideration of RM19 million, to be financed by internally-generated funds. Separately, KPJ's associate company KPJ Al-'Aqar REIT announced the acquisition of properties owned by JGWT for RM134.9 million. JGWT is primarily involved in operating a retirement village in Queensland, Australia.
KPJ's acquisition of JGWT will be undertaken in two tranches, subject to the terms and conditions of the deeds. Upon the completion of the first tranche, KPJ's interest in JGWT shall be approximately 21%, which will result in JGWT becoming an associate of KPJ. Upon completion of the second tranche, which is subject to and conditional upon all approvals being obtained for the proposed acquisition by Al-'Aqar, KPJ's interest in JGWT will be 51%, which will result in JGWT becoming a subsidiary of KPJ.
We are surprised with the acquisition as it comes in earlier than expected. Management had previously said that it was looking to expand into the retirement home business in a few years. Nevertheless, we view the acquisition positively as it marks a milestone for KPJ in terms of business and geographical expansion. We believe KPJ, which is supported by its well-established hospital network in Malaysia, is more than ready and capable of expanding beyond its existing business of providing private hospital services. The acquisition is in line with KPJ's long-term mission to become an integrated healthcare provider via expansion across other healthcare-related services. Apart from enlarging its existing customer base, we believe the acquisition will further establish KPJ as one of the leading healthcare and healthcare-related services providers in the region.
JGWT owns the aged care facility with 108 beds, 23 retirement villas and 32 apartments known as Jeta Garden, located on 64 acres in Bethania, Queensland. Bethania is located between Brisbane (about 32km northeast of Bethania) and the Gold Coast (about 42km south of Bethania). Jeta Garden is targeting a niche market among the Asian community, with all its villas and apartments being ergonomically and aesthetically designed to meet the needs of Asian seniors. These have features such as lower bench heights, shower seats and oriental-themed artwork. In addition, there are 24 acres of gently undulating parkland comprising a Chinese garden, gazebo, family barbecue area, lake and community vegetable garden.
For FYE June 2009, JGWT registered an audited net loss of A$3.1 million (RM9.1 million) and net liabilities of A$1.8 million. Including the revaluation of the above-mentioned 64 acres, JGWT's net assets as at June 30, 2009, will increase by approximately A$15 million. We are not concerned about its loss-making position as we believe this is largely due to the fact that Jeta Garden is still in its gestation period as it was opened three to four years ago. Although it is difficult to gauge the fairness of the purchase price of RM19 million due to a lack of comparison, we believe KPJ, as a rather conservative company in terms of capital investment abroad, has taken proper consideration before arriving at the purchase price for the 51% stake.
Judging from KPJ's track record in turning loss-making hospitals back to profitability, we believe the group is highly capable of doing the same for JGWT within a reasonable period, considering the sizeable market potential in Australia supported by a large population of baby boomers reaching retirement. To the best of our knowledge, the home retirement sector is an important one in Queensland as it is favoured by retirees partly due to its sub-tropical climate. Nevertheless, the home retirement business is a highly regulated industry in Australia with high-entry barriers, which we believe works in favour of KPJ in terms of potential competition.
With the acquisition expected to be completed in 1QFY11, we leave our FY10 earnings forecast unchanged. Pending further details from management on the acquisition, we are also leaving our FY11 forecast unchanged at this juncture. We maintain our buy recommendation at an unchanged target price of RM4.62, based on 18.5 times PER on FY11 EPS. Although KPJ's PER valuation has increased significantly over the last one year and is currently at 13.4 times FY11 EPS, KPJ is trading below its regional peer Parkway, which currently commands more than 20 times PER on FY11 EPS. We'd like to reiterate that KPJ is an excellent choice for long-term investment as well as portfolio balancing as the stock offers an exciting growth story in a defensive sector that is backed by a steady dividend payout. ' OSK Investment Research, Sept 23.
This article appeared in The Edge Financial Daily, September 24, 2010.
Company Name: KPJ HEALTHCARE BHD
Research House: OSK
KPJ Healthcare Bhd
(Sept 23, RM3.27)
Maintain buy at RM3.36 with target price of RM4.62: KPJ announced to Bursa Malaysia on Wednesday that its wholly-owned subsidiary, Kumpulan Perubatan (Johor) SB (KPJSB), has entered into subscription deeds to acquire up to 51% equity interest in Jeta Gardens Waterford Trust (JGWT) for a total consideration of RM19 million, to be financed by internally-generated funds. Separately, KPJ's associate company KPJ Al-'Aqar REIT announced the acquisition of properties owned by JGWT for RM134.9 million. JGWT is primarily involved in operating a retirement village in Queensland, Australia.
KPJ's acquisition of JGWT will be undertaken in two tranches, subject to the terms and conditions of the deeds. Upon the completion of the first tranche, KPJ's interest in JGWT shall be approximately 21%, which will result in JGWT becoming an associate of KPJ. Upon completion of the second tranche, which is subject to and conditional upon all approvals being obtained for the proposed acquisition by Al-'Aqar, KPJ's interest in JGWT will be 51%, which will result in JGWT becoming a subsidiary of KPJ.
We are surprised with the acquisition as it comes in earlier than expected. Management had previously said that it was looking to expand into the retirement home business in a few years. Nevertheless, we view the acquisition positively as it marks a milestone for KPJ in terms of business and geographical expansion. We believe KPJ, which is supported by its well-established hospital network in Malaysia, is more than ready and capable of expanding beyond its existing business of providing private hospital services. The acquisition is in line with KPJ's long-term mission to become an integrated healthcare provider via expansion across other healthcare-related services. Apart from enlarging its existing customer base, we believe the acquisition will further establish KPJ as one of the leading healthcare and healthcare-related services providers in the region.
JGWT owns the aged care facility with 108 beds, 23 retirement villas and 32 apartments known as Jeta Garden, located on 64 acres in Bethania, Queensland. Bethania is located between Brisbane (about 32km northeast of Bethania) and the Gold Coast (about 42km south of Bethania). Jeta Garden is targeting a niche market among the Asian community, with all its villas and apartments being ergonomically and aesthetically designed to meet the needs of Asian seniors. These have features such as lower bench heights, shower seats and oriental-themed artwork. In addition, there are 24 acres of gently undulating parkland comprising a Chinese garden, gazebo, family barbecue area, lake and community vegetable garden.
For FYE June 2009, JGWT registered an audited net loss of A$3.1 million (RM9.1 million) and net liabilities of A$1.8 million. Including the revaluation of the above-mentioned 64 acres, JGWT's net assets as at June 30, 2009, will increase by approximately A$15 million. We are not concerned about its loss-making position as we believe this is largely due to the fact that Jeta Garden is still in its gestation period as it was opened three to four years ago. Although it is difficult to gauge the fairness of the purchase price of RM19 million due to a lack of comparison, we believe KPJ, as a rather conservative company in terms of capital investment abroad, has taken proper consideration before arriving at the purchase price for the 51% stake.
Judging from KPJ's track record in turning loss-making hospitals back to profitability, we believe the group is highly capable of doing the same for JGWT within a reasonable period, considering the sizeable market potential in Australia supported by a large population of baby boomers reaching retirement. To the best of our knowledge, the home retirement sector is an important one in Queensland as it is favoured by retirees partly due to its sub-tropical climate. Nevertheless, the home retirement business is a highly regulated industry in Australia with high-entry barriers, which we believe works in favour of KPJ in terms of potential competition.
With the acquisition expected to be completed in 1QFY11, we leave our FY10 earnings forecast unchanged. Pending further details from management on the acquisition, we are also leaving our FY11 forecast unchanged at this juncture. We maintain our buy recommendation at an unchanged target price of RM4.62, based on 18.5 times PER on FY11 EPS. Although KPJ's PER valuation has increased significantly over the last one year and is currently at 13.4 times FY11 EPS, KPJ is trading below its regional peer Parkway, which currently commands more than 20 times PER on FY11 EPS. We'd like to reiterate that KPJ is an excellent choice for long-term investment as well as portfolio balancing as the stock offers an exciting growth story in a defensive sector that is backed by a steady dividend payout. ' OSK Investment Research, Sept 23.
This article appeared in The Edge Financial Daily, September 24, 2010.
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