KPJ Healthcare Berhad

KPJ enjoys IHH IPO spillover effect

KPJ HEALTHCARE BHD By Affin Investment Bank Buy (maintain) Target price: RM6.44 OVER the past six months

KPJ HEALTHCARE BHD By Affin Investment Bank Buy (maintain) Target price: RM6.44 OVER the past six months, KPJ's share price has performed exceedingly well, rising by 35% and closing the gap to our fair value of RM6.44. Apart from the stock's highly defensive nature, we believe the positive share price performance has also been triggered by the spillover effect from the recent listing of IHH Healthcare. At current price level, KPJ is trading at 19.5 times calendar year (CY) 2013 price to earnings ratio (PER) and 11.7 times EV/EBITDA (enterprise value and earnings before interest, taxes, depreciation and amortisation ratio), which is still below the industry average of 26 times and at a steep discount to IHH's valuation of 42 times CY 2013 PER and 15.5 times financial year (FY) 2013 EV/EBITDA. For 2012, we have factored in a moderate 8% growth in the number of outpatients, a modest assumption compared to the 13% outpatient growth registered in FY 2011. Similarly, for inpatients, we factored in a moderate 4% growth in 2012 and 5% growth thereafter, which is modest compared to its 4-year historical average growth of 9%. Given the group's ongoing expansion plans and occupancy rate of 70%, we believe there is upside potential to our earnings forecasts. Based on our simulation, for every 1 percentage point increase in outpatient and inpatient growth, our earnings forecast would be raised by 0.6%-1.7% per annum. KPJ Healthcare has opened KPJ Klang with an initial 30 beds this year. The hospital has a capacity for 150 beds. We gather that KPJ Pasir Gudang is on track for completion by the fourth quarter with a bed capacity of 120 beds. Recently, the group has finalised the acquisition of the remaining 49% stake in SMC Healthcare from Sabah Medical Centre for RM54.8mil which will be paid through internal funds. We are upbeat on KPJ's ongoing expansion, as it allows the group to capture the growing middle-income population and also the rising demand for private healthcare. KPJ is also well positioned to capture the growing market of medical travel'lers. The Malaysia Health Tourism Council and Association of Private Hospitals Malaysia estimate the number of medical travellers to grow by a compound annual growth rate of 14% to 1.1 million travellers in five years (2011 to 2016). Despite an annual capital expenditure of RM200mil for its expansion programme, we expect KPJ to continue generating positive free cash flow of about RM50mil to RMlOOmil a year. The group has a healthy cash balance of about RM200mil and a very low gearing of 0.2 times. As such, we believe KPJ is able to maintain its dividend payout ratio of about 35% which translates into a net yield of 2%. Pending its second quarter results this month, we maintain our forecasts at this juncture, but with an upward bias. For exposure to the domestic defensive and growing healthcare sector, we continue to like KPJ Healthcare for its sound fundamentals, ongoing expansion plans and undemanding valuation in comparison to its peer IHH.Our target price is unchanged at RM6.44 based on 20 times CY 2013 PER.