PP 7767/09/2010(025354

)

Malaysia

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)

MARKET DATELINE

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

3.

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

FBM KLCI

♦ ♦

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

IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank (previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. The recommendation framework for stocks and sectors are as follows : Stock Ratings Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months. Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks. Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months. Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months. Industry/Sector Ratings Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. securities, subject to the duties of confidentiality, will be made available upon request. Additional information on recommended

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