KPJ Healthcare Berhad

KPJ reaffirms strategy to grow organically

Maintain buy at RM6 with a target price of RM6.44

Maintain buy at RM6 with a target price of RM6.44: While other players are embarking on a more aggressive mergers and acquisitions (M&A) approach, KPJ has reaffirmed its strategy to grow organically over the next few years to drive sustainable growth in capacity and market share. The group has identified several new development projects for the next five years which will require a capital expenditure (capex) of up to RM1 billion for the development of new hospitals.

Beyond 2015, the group is looking to expand its presence further into Sabah and Sarawak. The group has already secured the land and zoning allocation to construct new hospitals in Miri and Kuching in Sarawak, as well as in Bandar Botanic in Klang, Selangor.

Going forward, the group will continue to diversify regionally to expand its knowledge and technical know-how. While it is looking to strengthen its position in Jakarta, KPJ is looking to venture into Thailand to gain knowledge on the country's health and medical tourism speciality. With a presence in every state and its ongoing expansion, KPJ is poised to benefit from the continued growth in medical travellers.

KPJ managing director Datin Paduka Siti Sa'adiah's contract will end in December and we gather that no decision on renewal has been made yet. Nonetheless, we are not concerned as we are assured that the group is well prepared and has internally trained and prepared a succession plan.

Despite an annual capex of RM200 million to RM250 million for its expansion programme, we expect KPJ to continue generating positive free cash flow of about RM50 million to RM100 million a year. For exposure to the domestic defensive and growing healthcare sector, we continue to like KPJ for its sound fundamentals, prudent and organic expansion plans and undemanding valuation in comparison to its peer IHH Healthcare Bhd.

Our target price is unchanged at RM6.44 based on 20 times CY13 PER. The stock also offers a decent yield of 2%. Re-rating catalysts include (1) continuous growth in private healthcare demand in tandem with a growing middle-income population, (2) growth in medical tourism and (3) the group's continuous expansion programmes. Affin IB Research, Oct 23