KPJ Healthcare Berhad

KPJ s first step into Thailand

Maintain buy at RM6 with a target price of RM6.44: KPJ Healthcare Bhd has entered into a conditional share sale and purchase agreement with Aureos Southeast Asia Fund and GSB Private Funds to acquire their entire equity holdings in VPCL of eight million preference shares (23.37% stake) for a total cash consideration of RM60.5
million (605.6 million Thai baht),which is equivalent to RM7.57 per share. The acquisition is expected to be completed by the second quarter of 2013 (2Q13).

VPCL operates Vejthani Hospital, a multispecialty private hospital in Bangkok, Thailand. VPCL has a registered capital of RM34.2 million consisting of 34.2 million
shares with a par value of RM1 each. The shares in VPCL are divided into 26.2 million ordinary shares and eight million preference shares. The preference shares of VPCL rank pari-passu with ordinary shares and are entitled to a dividend of 7.5 sen per share and to one vote each. With the proposed acquisition, KPJ is entitled to nominate two  representatives to the board of directors of VPCL. For the financial
year 2012/11 (FY12/11), VPCL registered  a profit before tax of RM7.8 million.

The total purchase price of RM60.5 million will be financed through borrowings — proceeds from Islamic commercial papers and internal funds. The purchase price is based on nine times estimated earnings before interest,taxes, depreciation  and amortisation of RM32 million less net debt, which we think is reasonable. KPJ has a healthy cash balance of about  RM200 million and a very low gearing of  0.2 times. The purchase price of  RM60.5 million will have a minimal impact on the group's gearing level. Meanwhile, based on the 7.5 sen per share dividend,  the investment will give a minimum contribution of RM600,000 a year.

We are positive on KPJ's investment and venture into Thailand.The move  is part of the group'slongterm plan to gain knowledge on Thailand's health  and medicaltourism speciality. The risk to the investment is fluctuation in the exchange rates,  though this is mitigated by the small exposure.

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 calendar year 2013 priceearnings ratio. Rerating catalysts include:
1) continuous growth in private healthcare demand in tandem with the growing middle income population;
2) growth in medical tourism; and
3) group's continuous expansion programmes.
— Affin IB Research, Nov 26