PP 7767/09/2010(025354



10 March 2010

Corporate Highlights
New s Upda te

RHB Research Institute Sdn Bhd A member of the RHB Banking Group
Company No: 233327 -M

10 March 2010 Share Price Fair Value Recom : : : RM2.57 RM3.20 Outperform (Maintained)


KPJ Healthcare
Injecting Another Three Hospitals Into KPJ REIT

Table 1: Investment Statistics ( KPJ; 5878 ) FYE Dec 2009a^ 2010f^ 2011f 2012f Revenue (RMm) 1446.4 1602.4 1778.3 1972.1 Net Profit (RMm) 98.8 115.6 122.6 145.1 EPS (sen) 18.7 21.9 23.2 27.5 Growth (%) 15.3 17.1 6.0 18.3 PER (x) 13.7 11.7 11.1 9.3 C.EPS* (sen) 20.0 21.0 27.0 P/NTA (x) 2.7 2.2 1.8 1.5 (x) 0.4 0.4 0.3 0.3

Bloomberg Ticker: KPJ MK Net gearing ROE (x) 15.9 15.7 14.3 14.4 Gr. Div. Yld. (%) 4.7 5.4 6.2 7.0

Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC ^ Core net profit

* Consensus based on IBES Estimates

Selling of three hospital buildings to KPJ REIT. KPJ is selling off three hospital buildings i.e. RS Bumi Serpong Damai, Kluang Utama Specialist Hospital and Bandar Baru Klang Specialist Hospital to Al-Aqar KPJ REIT (KPJ REIT) for RM138.8m to be satisfied with RM83.3m cash and 56.6m new units in KPJ REIT at an issue price of RM0.98 and a 5.8% discount to its NAV of RM1.04 as at 25 Feb 10. The transaction will: 1. 2. Result in a one-off gain of RM3.36m or an earnings improvement by 2.9% to the revised net profit forecast. Increase KPJ’s stake in KPJ REIT from 301.4m units or 42.8% (after the completion on acquisition of Tawakal Hospital) to 358.1m units of 50.9%; and Reduce KPJ’s net debt and gearing from RM222.7m and 0.36x as at Dec 09 to RM142.7m and 0.23x.

Issued Capital (m shares) Market Cap(RMm) Daily Trading Vol (m shs) 52wk Price Range (RM) Major Shareholders: Johor Corporation Kumpulan Waqaf An-Nur Lembaga Tabung Haji FYE Dec EPS chg (%) Var to Cons (%) PE Band Chart FY10 0.2 9.6 FY11 0.3 10.7

527.6 1373.9 0.9 0.93-2.61 (%) 50.2 8.8 5.1 FY12 0.3 1.8


PER = 11x PER = 9x PER = 7x

Unlocking asset value. We are positive on KPJ’s latest move as it is consistent with its strategy to continuously “recycle” its capital to drive growth, i.e. to partially cash out while maintaining control of its hospital assets by injecting them into KPJ REIT, and ploughing back the cash to fund further acquisitions. We also think that the transaction price for the three hospital buildings is fair given that it is transacted at market value according to PT Penilai / Collier International. Forecasts. We tweaked our earnings forecasts up by 0.2-0.3% for FY10-12 to reflect interest and depreciation savings and higher associate contributions, which would more than offset the increase in rental expense. We do not factor the RM3.36m one-off gain in our forecast as it is an EI. Risks. KPJ’s earnings are vulnerable to any serious disease outbreak in Malaysia such as SARS or swine flu, as the infected patients will have to be separated and admitted to government-appointed specialised hospitals. Investment case. We maintain our Outperform call on KPJ with fair value of RM3.20 based on 14.5x FY12/10 EPS, in line with our 14.5x target PE for the consumer sector. We like KPJ as: 1) valuations remain lower than the regional peers average PER of 17x; and 2) rising affluence and higher take-up of insurance policies in Malaysia. Our target PE is on the high end of its historical 5-year PE band of between 5-15x.

Relative Performance To FBM KLCI

KPJ Healthcare


♦ ♦

Hoe Lee Leng (603) 92802239 hoe.lee.leng@rhb.com.my

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10 March 2010

Table 2. Earnings Forecasts FYE Dec (RMm) FY09a Turnover Turnover growth (%) Cost of Sales Gross Profit EBITDA EBITDA margin (%) Depreciation Net Interest Associates Pretax Profit Tax Minorities Net Profit 1446.4 14.1 (1025.9) 420.4 185.0 12.8 (46.5) (16.6) 20.1 142.0 (34.2) (5.9) 98.8

FY10F 1602.4 10.8 (1137.7) 464.7 202.0 12.6 (48.6) (13.7) 28.8 168.5 (42.1) (10.8) 115.6

FY11F 1778.3 11.0

FY12F 1972.1 10.9

Table 3. Forecast Assumptions FYE Dec FY10F No. of hospitals No of in-patients No. of out-patients 21 237,512 2,238,989

FY11F 23 258,888 2,373,328

FY12F 25 282,188 2,515,728

(1262.6) (1400.2) 515.7 571.9 223.2 12.6 (58.1) (13.6) 30.7 182.3 (47.4) (12.3) 122.6 259.8 13.2 (57.4) (14.2) 30.7 218.9 (59.1) (14.7) 145.1

Source: Company data, RHBRI estimates

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