M&A Research M&A Securities Company Update PP14767/09/2012(030761) Thursday, May 05, 2016 KPJ Healthcare Bhd HOLD (TP: RM4.27) Patient Volume Sets To Pick Up There have been a number of new developments in KPJ Healthcare Bhd (KPJ) since our last report and we are writing this to update its key events in the last 12 months including some major asset acquisitions and collaborations with international markets. We also take this opportunity to roll over our valuation into FY17 and revise our target price to RM4.27, pegged to its 5-year PER of 27x to our FY17 EPS forecast of 16 sen. KPJ is a HOLD. Remains largest private healthcare chain in Malaysia. Having 25 hospitals with presence in almost every state in Malaysia (except for Perlis, Melaka and Terengganu where the on-going expansion plans will soon cover the first two states under the greenfield projects), KPJ is set to further enlarge its footprint nationwide by adding 1,100 bed capacity to its existing 2,912 hospital beds underpin by the construction of 9 new hospitals by 2018. The number of hospital and bed capacity would exceed its closest rival IHH Healthcare which would see only 1 new hospital with total estimated 3,000 beds in Malaysia for the same period of time. Embarking on greenfield and brownfield expansion plans. KPJ will expand its hospital network from the current 2,912 operating beds to 4,752 (+63% by 2018). Out of the additional 1,840 beds, 1,190 beds will be added from 9 new hospitals while the brownfield projects are expected to ramp up the remaining 650 beds by 2017. The KPJ Tg Lumpur and KPJ Perlis projects will be the two new hospitals slated to open in the nearest future (in 3Q 2016 and 1Q 2017, respectively). Whereas for the existing hospital expansion, KPJ Selangor will expand its clinics by 54 beds, targeting to open by 2Q 2016 while the rest are slated to complete the expansion by 2Q 2017. Current Price (RM) RM4.24 New Fair Value (RM) RM4.27 Previous Fair Value (RM) RM3.92 Previous Recomm. HOLD Upside To Fair Value 0.1% Dividend Yield (FY15F) 2% Stock Code Bloomberg KPJ MK Stock & Market Data Listing MAIN MARKET Sector Healthcare Shariah Compliance Yes Issued Shares (mn) 1,040.8 Market Cap (RM mn) 4,416mn YTD Chg In Share Price 0.5% Beta (x) 0.6 52-week Hi/Lo (RM) RM4.42 RM3.96 6M Average Volume (mn shares) 1.23mn Estimated Free Float 30% Major Shareholders Johor Corp 44.5% EPF 12.2% Waqaf An-Nur Corp 7.3% 1
Fig.1 New Hospitals in the Pipeline Project Location Total Capacity Operating Beds Target Opening Tg Lumpur Kuantan, Pahang 190 120 3Q2016 Perlis Kangar, Perlis 90 60 1Q2017 Kuching Sarawak 150 130 4Q2017 Bandar Dato'Onn (BDO) Johor Bahru, Johor 150 90 4Q2017 Miri Permyjaya, Sarawak 100 60 3Q2018 UTM Skudai, Johor 150 60 3Q2018 Melaka Cheng, Melaka 90 60 TBA Port Dickson Negeri Sembilan 90 60 TBA Kota Bayuemas Klang, Selangor 180 110 TBA Total 1,190 750 Fig.2 Brownfield Expansion Hospitals Description Capacity (bed) Target Opening KPJ Selangor Clinics 54 2Q2016 KPJ Puteri Beds 66 1Q2017 Taiping Clinics 18 1Q2017 KPJ Ampang Beds 150 2Q2017 Clinics 33 2Q2017 KPJ Johor Beds 53 2Q2017 Sri Manjung Beds 30 2Q2017 KPJ Seremban Beds 90 3Q2017 KPJ Penang Beds 156 3Q2017 Total 650 High leverage on debts. To facilitate the expansion plans, KPJ will allocate more than RM1 billion capex over the next 3 years for the 9 new hospitals in 7 different states with annual capex of RM330 million. The company s net gearing stood at 78% based on FY15 annual figures, increasing from 75% in FY14 owing to 24% rise in total borrowings. Having long gestation period of 3-5 years for hospital operating business, we expect the greenfield projects to undergo loss-making phase in the early years upon completion, hampering internal fund liquidity that would lead to incurring more borrowings to execute its expansion plans. Several fund raising options can be employed by KPJ to pare down the mounting debt level including rights issue, private placement, disposal of warrants, injecting assets to Al Aqar Healthcare REIT, etc. To date, KPJ has 86 million outstanding warrants that will expire in January 2019 (exercise price: RM4.01) which could potentially bag in RM345 million cash upon full conversion. 2
Number of medical tourist Market Access In Thousands ('000) Apart from the abovementioned, the brownfield expansion plans which slated to add 650 bed capacity and complete by 2017, could also help relieve the staggering financials of KPJ in the foreseeable future, maintaining the group s gearing within the target zone. Slowdown in patient volume growth. In FY15, the total number of patient fell from 2,815,000 to 2,757,000 (-2% y-o-y) driven by declining number of outpatient. This was due to several factors including lower spending power of consumer after the introduction of GST in 2014, the economic slowdown that could have contributed to stagnant growth in medical tourism (see fig.4), retrenchment of staff which led to termination of staff benefits to medical allowances, etc. We expect patient volume to pick-up upon the completion of most brownfield projects as well as the 2 new hospitals (Tg. Lumpur and Perlis projects) coming on stream by FY17 which would see an additional 900+ bed capacity ready. The introduction of e-visa by mid-2016 under Budget 2016 is also expected to attract more medical tourist to Malaysia. Fig.3 Patient Volume 3,000 2,500 2,000 1,500 1,000 500-2,629 2,694 2,737 2,815 2,757 2,388 2,444 2,475 2,534 2,476 241 250 262 281 281 2011 2012 2013 2014 2015 Inpatient Outpatient Total patient Fig.4 Medical Tourist 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 881,000 882,000 850,000 728,800 641,000 2011 2012 2013 2014 2015 3
Financial Highlights. In FY15, KPJ recorded 8% y-o-y growth in revenue from RM2.6 billion to RM2.8 billion mainly driven by the Malaysia s segment and the support services division which grew by 9% and 11% y-o-y, respectively. However, bottom line was weighed by the implementation of Employee Share Option Scheme (ESOS) and Restricted Issue to Hospital Consultants (RIHC) charges which cost KPJ a total of RM46.2 million, subsequently leading to a lower PATMI of RM133 million (-7.2% y-o-y), versus RM143 million in FY14. All revenue segments registered positive growth ranging from 9% to 58% in FY15 mainly contributed by support services, corporate and others as well as newly opened hospitals such as KPJ Klang, KPJ Rawang, KPJ Pasir Gudang which mostly are at their later stage of gestation period. We anticipate revenue to continue to grow at double-digit in FY16-18 with steady gross margin of 28%-30%. PATMI is expected to grow by 3%/18%/8% to RM137 million/ RM162 million/ RM174 million in FY16/17/18, respectively. We believe patient volume would start to pick up again in FY17 when a number of hospitals complete their gestation stage. This could also help lift the operating cash flow to RM382 million and RM423 million in FY17/18, respectively. Key challenges. There are a number of key challenges that the company could be facing in its industry that would potentially affect the earnings profile in the mid-long run such as: Limited pool of healthcare professionals for sub-specialty Difficulty in maintaining encouraging profit margins consistently in this highly regulated industry which requires great amount of resources especially for greenfield projects that come with long gestation period of 3-5 years Difficulty in keeping new hospital development on track from the costs and timeline perspectives Potential structural/policy changes including AEC, AFTA, TPPA, etc Competition from other big players such as Pantai, Gleneagles, government hospitals, etc Changes to forecast. We have revised our earlier FY16 earnings forecast by shaving 16% of the PAT due to the heightened interest costs from hefty borrowings it undertook in FY15 and expect EPS to grow by 3-year CAGR of 9.5% in FY15-18F, driven by higher contribution from KPJ hospitals in Klang, Pasir Gudang, Rawang and Maharani which are entering their final stage of gestation period. Valuation. We revise upward our target price from RM3.92 to RM4.27, pegged to its 5-year PER of 27x our FY17 EPS forecast of 16 sen, suggesting a HOLD call for now as we expect local healthcare industry to remain challenging in addition to the expectation of stagnant inpatient and outpatient growth moving forward. However, we are optimistic on the growth in medical tourism amid weakening Ringgit which will make Malaysia a more attractive destination to seek for medical treatments. 4
Fig 5: Peers Comparison Company EPS (sen) P/E (X) P/B (X) Div Year Price ROE Target Yield End (RM) FY14 FY15 FY14 FY15 FY14 FY15 (%) Price (%) Call IHH Healthcare Dec 6.57 9 11 52 57 2.0 2.4 4.5 0.5 6.49 HOLD KPJ Dec 4.20 14 13 26 32 3.0 3.0 10.0 2.0 4.27 HOLD Average 12 12 39 45 2.5 2.7 Source: Bloomberg, M&A Securities Fig 6: Financials FYE Dec (RM million) FY14A FY15A FY16F FY17F FY18F Revenue 2,639 2,818 3,224 3,583 3,943 COGS (1,865) (1,994) (2,299) (2,503) (2,783) Gross Profit 774 824 926 1,080 1,160 EBITDA 114 110 105 161 143 Depreciation (93) (108) (121) (137) (154) EBIT 208 218 226 298 297 Net interest income (30) (52) (56) (61) (66) Profits from associates 40 39 42 41 41 PBT 218 206 212 278 272 Tax & Zakat (71) (63) (67) (87) (86) PAT 147 142 145 191 186 Non-controlling interest 4 10 10 13 13 PATMI 143 133 135 178 174 EPS 14 13 13 17 17 EBITDA margin 4% 4% 3% 5% 4% EBIT margin 8% 8% 7% 8% 8% PBT margin 8% 7% 7% 8% 7% Net profit margin 5% 5% 4% 5% 4% Source: Bloomberg, M&A Securities 5
Fig 6: Hospital Network No. Hospital list Location Malaysia Bed capacity (approximation) 1 Kedah Medical Centre Kedah 134 2 KPJ Penang Specialist Hospital Penang 168 3 Sri Manjung Specialist Centre Perak 30 4 KPJ Ipoh Specialist Hospital Perak 260 5 Taiping Medical Centre Perak 48 6 KPJ Ampang Puteri Specialist Hospital Selangor 217 7 KPJ Damansara Specialist Hospital Selangor 209 8 KPJ Selangor Specialist Hospital Selangor 173 9 KPJ Kajang Specialist Hospital Selangor 132 10 KPJ Klang Specialist Hospital Selangor 187 11 KPJ Rawang Specialist Hospital Selangor 160 12 KPJ Tawakkal Specialist Hospital KL 200 13 KPJ Sentosa KL Specialist Hospital KL 201 14 KPJ Seremban Specialist Hospital N.Sembilan 134 15 Kluang Utama Specialist Hospital Johor 50 16 KPJ Pasir Gudang Specialist Hospital Johor 136 17 KPJ Bandar Maharani Specialist Hospital Johor 120 18 KPJ Johor Specialist Hospital Johor 215 19 KPJ Puteri Specialist Hospital Johor 158 20 KPJ Perdana Specialist Hospital Kelantan 129 21 KPJ Kuantan Specialist Hospital Kuantan 188 22 Sibu Medical Centre Sarawak 35 23 KPJ Kuching Specialist Hospital Sarawak 300 24 KPJ Damai Specialist Hospital Sabah 56 25 KPJ Sabah Specialist Hospital Sabah 175 Indonesia 1 RS Medika Permatu Hijau Jakarta 100 2 RS Medika Bumi Serpong Damai Jakarta 220 Thailand 1 Vejthani Hospital Bangkok 194 Bangladesh 1 Sheikh Fazilatunnessa Mujib Memorial Dhaka 50 Total 4,379 6
M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +15% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -15% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities Sdn Bhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47, 43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur Tel: +603 2282 1820 Fax: +603 2283 1893 Website: www.mnaonline.com.my 7