Company Name: KPJ HEALTHCARE BHD
Research House: RHB
KPJ Healthcare Bhd
(June 17, RM3.34)
Maintain outperform at RM3.29 with higher fair value of RM4.25 (from RM3.50): For FY09, KPJ recorded a revenue growth of 14.9% year-on-year (y-o-y) largely due to higher contribution from all of its business segments.
Moving forward, we believe KPJ's revenue growth drivers include: the opening of at least two new hospitals per annum; expansion of its existing hospitals; enhancing its presence in medical tourism; and higher utilisation rate per patient.
We understand that KPJ is investing RM200 million 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 per annum either through greenfield projects or acquisition of established hospitals which would likely be in East Malaysia, the East Coast or Iskandar region.
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 is on positioning itself as a community healthcare provider, 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 three to five years. Currently, medical tourism accounts for less than 10% of total group revenue.
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 (minority interest) assumptions.
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.
Besides the earnings revision above, our indicative fair value has been raised to RM4.25 (from RM3.50) based on target FY11 PER of 16 times (10% discount to regional peers' average) as we roll forward our valuation year (from FY10).
We believe the M&A (merger and acquisition) 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. ' RHB Research, June 17
This article appeared in The Edge Financial Daily, June 18, 2010.