KPJ Healthcare Berhad RM4.18: Buy

Results Review

Share price: RM4.18
Target price: RM5.10

Niche specialist with regional dreams Initiate

Initiate coverage with BUY and target price of RM5.10. KPJ is wellpositioned
to benefit from the fast-growing healthcare sector in
Malaysia. This sector has been identified as one of the 12 key pillars in
the country‟s Economic Transformation Programme and is expected to
contribute USD10.4b to the Gross National Income by 2020. As a
defensive play, KPJ also offers limited revenue downside given its
domestic dominance and a wide array of positive demand factors.

Entrenched market leader. KPJ operates 20 private hospitals in
Malaysia, the largest network among local private hospital operators,
and has a 19% share of total private hospital beds. As the leader of the
domestic market, it stands to reap the greatest benefits from the rising
healthcare needs of the local population.

Limited revenue downside. The ever-growing demand for private
healthcare services in Malaysia limits the downside risk to revenue for
KPJ. This relatively inelastic demand is underpinned by structural
factors such as the increased number of elderly people, growing
population, higher per capita income and strain on public-sector
healthcare system.

New hospitals, new foreign patients. KPJ plans to add 1-2 hospitals
each year in its efforts to expand its hospital network. By end-2013,
KPJ could have added up to five new hospitals, and expanded its bed
capacity by up to 35%. We also expect the company to compete more
aggressively for foreign patients in the medical tourism sector. Its
education business could also serve as another thrust for growth.

Cheapest valuation, highest dividend yield. KPJ is the cheapest
hospital stock vis-à-vis its regional peers, trading at FY12F PER of
18.1x vs the peer average of 22.3x. Nevertheless, it offers the highest
yield at 2.4% net. We expect revenue growth of 13-18% over FY11-13
as its hospital network expands and it becomes a bigger player in
medical tourism. Corresponding net profit would grow by 8-19% over
the same period. Initiate coverage with BUY and TP of RM5.10, based
on 22x PER on FY12F fully diluted EPS, pegged to peer average.
(Information from MBB Investment Bank)