 Recommendation: Buy TARGET Price: RM6.98 by MIDF Research Sdn Bhd
(Sept 13) Investment Highlights KPJ Healthcare Bhd's subsidiary, Ipoh Specialist Hospital Sdn Bhd (ISH), has entered into a conditional share sale agreement with Dr Lee Min Chuang and Yeat Soo Sing to acquire a 100% equity interest in Seri Manjung Specialist Centre Sdn Bhd (SMSC) for a total cash consideration of RM14.25m.
The acquisition is expected to be completed by the end of 4QCY12.
SMSC is a company principally engaged in specialist medical practices and operation of specialist hospital. It owns and operates the SMSC, which is located in Sitiawan, Perak.
The acquisition will be financed through internally generated funds of KPJ. As at end of June 2012, KPJ had a cash holding of RM212.2m. Therefore, assuming no major movement in KPJ's cash position, the acquisition will cause a less than 7% setback in KPJ's coffers, which we do not think is a major concern.
Earnings contribution to be negligible. From the information that we gathered, SMSC currently has less than 30 beds in operation.
Considering the total number of licensed beds that KPJ currently operates, which stands at around 2,700 beds, the acquisition will add a mere 1% to the number of beds in KPJ's stable. Thus, we do not expect the addition of the new hospital to have a material impact on KPJ's future earnings.
Move in tandem with peers. KPJ's move is tandem with its peers to tap into the growing private healthcare demand in the district in Manjung, Perak. Currently, IHH Healthcare Bhd is developing the new Pantai Hospital Seri Manjung, while Columbia Asia Hospital is constructing the Columbia Asia Hospital, Sitiawan, which is expected to be opened by end 2012.
Positive on the acquisition. Seri Manjung town is developing as a well-planned administrative town, housing various government buildings. Manjung District has the second-highest average annual growth rate in Perak, with a 2% growth rate.
Adding the popular tourist destination of Pangkor Island, we believe there is a huge demand potential for private healthcare services ready to be tapped in the region. Therefore, we are positive on KPJ's move to expand its network into this area, as we expect the demand can only increase in the upcoming years.
Maintain 'Buy' with an unchanged TP of RM6.98. We maintain our 'Buy' call with a TP of RM6.98, derived from 25x PE multiple of FY13F EPS, based on peers' average PE multiple. Due to the company's continuous growth story, we believe there is an ample upside potential for the stock in the long run.
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