KPJ Healthcare Berhad

KPJ plans takeover of Rawang Specialist Hospital for RM51m

KPJ Healthcare Bhd has announced the acquisition of a 159bed specialist hospital in Rawang for a sum of RM50.6m, to be financed by internally generated funds.

Recommendation: Outperform TARGET Price: RM6.50 by Publiclnvest Research (April 18) News KPJ Healthcare Bhd has announced the acquisition of a 159bed specialist hospital in Rawang for a sum of RM50.6m, to be financed by internally generated funds. Construction of the hospital, Rawang Specialist Hospital (RSH) is currently near completion and the Certificate of Completion and Compliance is expected to be obtained by the end of June 2013. The Deal KPJ Healthcare would be paying RM50.6m to acquire Rawang Specialist Hospital Sdn Bhd (RSHSB) which owns RSH. KPJ would also be consolidating RSHSB's existing loan facility, estimated at RM37.5m when fully drawn down. Hence the takeover price of RSH is actually closer to RM88m. Our View We deem the price paid for RSH reasonable as we estimate the fair value of RSH to be approximately RM71m based on recent acquisitions. We believe the premium is justified given that KPJ Healthcare is saving on time and development cost of building a hospital from scratch. More importantly, RSH has a ready lineup of doctors to staff the hospital, and a captive market in the area of Rawang. We also believe the prospects of RSH upon commencement of operations would be better than the Klang Specialist Hospital, as RSH would be the only multi discipline specialist hospital catering to Rawang, which has a population of more than lm in the vicinity. Assuming the acquisition is fully paid in cash, there would still be minimum impact on KPJ Healthcare's net gearing, which we estimate to increase to 0.4x from 0.3x in FY12. KPJ Healthcare is the largest private healthcare group in Malaysia with a network of 20 hospitals nationwide and two more in Indonesia. It also owns an education arm through KPJ International University College of Nursing and Health Sciences. Maintain 'Outperform' We are maintaining our target price of RM6.50 based on FY14 forward PE of 25x. No changes to our earnings estimates yet pending further clarification from the management. Nonetheless we understand that RSH would likely commence operations in 2014.