KPJ Healthcare Berhad

Malaysian Reserve, Malaysia : KPJ Healthcares growth story continues

Highlights PURSUANT to the meeting we had with KPJ Healthcare Bhd's management recently, we remain upbeat about the company's prospect as underlined by these key takeaways:

Recommendation: Buy TARGET Price: RM6.98 by MIDF Research

Highlights PURSUANT to the meeting we had with KPJ Healthcare Bhd's management recently, we remain upbeat about the company's prospect as underlined by these key takeaways: 1.Private healthcare industry to maintain resilient growth; 2.Aggressive expansion plan to be sustained; 3.Asset light strategy to support expansion; 4.New venture into aged care business; and 5.Growing medical tourists. Asset Light Strategy Continues KPJ has completed the 4th and 5th tranche asset injections into its associate, Al-'Aqar Healthcare REIT in 2011 and 2012. It is now in the midst of processing the 6th tranche of asset injection.

This asset light strategy KPJ has been adopting has enabled it to unlock the value and realise the capital gains in its assets, and free up cash for further expansions. KPJ also stands to reap steady dividends from its Al-'Aqar shareholding.

We continue to like this strategy, which we believe has been a major contributing factor to the impressive growth of KPJ in recent years. Industry Set for Continuous Growth As for 2011, total healthcare spending in Malaysia amounted to 4.7% of the country's GDP. This is relatively still way below the level of the developed countries. By comparison, in 2011, healthcare spending amounted to 16.2% of GDP in the US and 10.9% of GDP in Germany.

Therefore, the healthcare industry in this region is set for strong growth, driven by the changing demographic, growth of the middle income group, congested public healthcare services, greater insurance penetration and growing health tourism. Positive Outlook KPJ commenced operation of KPJ Klang Specialist Hospital in May 2012, and we believe the growth story of KPJ will continue in the foreseeable future.

Based on its proven track record, we are confident that the company's management will be able to sustain KPJ's growth momentum, maintaining its top line growth rate and preserving its profitability. Upgrade to 'Buy' with a Revised TPofRM6.98 We roll over our valuation to FY13F, with a revised TP of RM6.98. This is derived from 25x PE multiple of FY13F EPS, based on peers average PE multiple.

The share price of KPJ has seen a strong positive movement over the last few months, which we believe this has been part of the positive spillover effect from the dual listing of IHH Healthcare Bhd recently.

With this catalyst, we expect KPJ to no longer trade at a discount to its peers, but should fetch the same valuation to its regional peers.