Demand for healthcare services is relatively recession-proof, so we do not expect KPJ Healthcare’s (RM4.28) earnings to be affected by the prevailing uncertainties and global economic slowdown. Indeed, the company continues to plan for new additions to its network of 20 specialist hospitals in the country. KPJ also manages two hospitals in Indonesia.
Last month, KPJ announced plans for two new hospitals in Klang and Penang. The company also proposes to acquire several plots of land in Sazaen Business Park, Klang, for some RM23.8 million. Development costs for the total area of 1.84ha are estimated at RM110 to RM120 million, while construction costs for the hospital building are about RM80 million. We expect completion in 2015.
The company has entered into an agreement to lease a hospital building from Aseania Development for a 10-year period. This new facility will be on land adjacent to the existing Penang Specialist Hospital. Aseania has the rights to develop a township in Seberang Prai and will build the medical facility according to KPJ’s specifications.
These plans are in line with the company’s target to open at least one or two hospitals per year over the next few years. It already has several new projects under development.
Expansion projects under development
Construction of the Bandar Baru Klang Specialist Hospital is complete and the hospital is expected to open within the next few months. This hospital has been earmarked for sale to the Al-’Aqar KPJ REIT, along with the Kluang Utama Specialist Hospital and Rumah Sakit Bumi Serpong Damai in Indonesia for a collective RM139 million.
In addition, construction of a new hospital building in Kota Kinabalu is underway. Upon completion, expected to be in 1H12, the Sabah Medical Centre will be relocated from its existing facility to the new building. The new 250-bed hospital is expected to cost RM180 to RM200 million. Recall that KPJ acquired a 51% stake in Sabah Medical Centre, back in June 2010 for RM51 million. Two other smaller hospitals, in Muar and Pasir Gudang, are planned for 2H12.
Looking further head, KPJ has plans for another hospital in Tanjung Lumpur, Kuantan, under a 70:30 joint venture with Pasdec Corp. The hospital building is slated to complete sometime in 2013. Another specialist hospital in Perlis, one of the three states where KPJ does not have a presence, is on the drawing board. This 90-bed hospital will be a 60:40 joint venture with the Yayasan Islam Perlis. Construction is targeted for completion in 2014. The company is also in preliminary discussions to set up a hospital in Bandar Datuk Onn, Johor. This facility is estimated to have a capacity of almost 400 beds once it is fully operational.
These new hospitals and organic expansion will underpin growth over the next few years. Typically, a new hospital opens in phases, with the addition of more beds, facilities and range of services over time in lockstep with demand growth.
Given its experience, KPJ is also exploring opportunities to provide consultancy to other providers, both locally and abroad, in areas such as healthcare business development and hospital management.
Expanding upstream education arm
At the same time, KPJ plans to expand its education arm, in part to support the growth of its hospital network. The company first set up the Puteri Nursing College back in 1991 to ensure a steady pool of capable and qualified nursing staff for its hospitals. The college was recently awarded university college status, and renamed KPJ International University College of Nursing and Health Sciences (KPJIC). That means it can now offer its own degree programmes.
In view of its relative success, however, KPJ now plans to develop KPJIC into a leading centre for nursing and medical-related studies in the country — to produce qualified healthcare personnel not only for its own hospitals but also for other private healthcare operators and the public healthcare sector.
KPJ believes it has an edge over similar education groups in the market, in that it can leverage existing infrastructure. For instance, students can undergo clinical practice in its network of hospitals where its medical consultants and senior nurses can also give lectures and guidance. Indeed, the company has not registered any noticeable drop in student intake, unlike slowing growth for some of its peers.
KPJIC has total capacity for 2,500 students at its main campus in Nilai, Negri Sembilan, and a branch campus in Johor Baru. A second branch campus is currently under construction in Bukit Mertajam. Some RM120 million has been budgeted to expand the campus in Nilai in two phases. The company expects capacity to increase to 5,000 students by 2013. By 2016, KPJIC hopes to achieve full university status, with its own medical school and total student intake capacity of some 10,000, including local and foreign students.
Longer-term venture into retirement village and aged care facilities
Over the longer term, KPJ is looking to expand its services to include retirement homes and aged care facilities — a market segment that is expected to grow rapidly. Indeed, this market is already a big business in most developed countries.
According to the latest Census 2010, there is a gradual shift in Malaysia’s demographics with the proportion of those below the age of 15 falling to 27.6% from 33.3% in 2000 while those aged 65 and above rose to 5.1% from 3.9% over the same period. At this pace, we will hit the definition of ageing population by 2015. The long-term uptrend in average life expectancy is another stronger driver for demand for aged care services.
To gain a first mover advantage, KPJ acquired a 51% stake in Jeta Gardens for RM19 million. Jeta owns and operates a 26ha retirement village in Queensland, Australia. The project is still only partially developed and currently consists of 23 retirement villas, 32 apartments and a 108-bed aged care facility. The longer-term plan is to develop it into a one-stop centre that includes an aged care nursing college and medical centre.
While earnings contribution from Jeta is expected to be minimal, the company intends to gain valuable insights and experience from this venture, a business model it hopes to emulate locally.
On track for steady earnings growth
The company’s latest earnings results for 3QFY11 were broadly in line with our expectations. Turnover rose 9% year-on-year (y-o-y) to RM476 million, underpinned by rising demand for healthcare services as well as the addition of Sibu Specialist Medical Centre to its network of specialist hospitals in April 2011.
In line with the higher turnover, pre-tax profit increased 11% y-o-y to RM47.9 million while net profit rose 14% to RM34.5 million. There were no major extraordinary items during the quarter. Net profit for the full-year is estimated at roughly RM124.8 million, up from RM118.9 million in 2010 (including one-off gains totaling some RM8.2 million). Earnings are forecast to expand further to RM131.2 million in 2012. That prices the stock at roughly 20 times our estimated earnings for 2011and 19 times for 2012 and 22.2 and 21.1 times on a fully-diluted basis. Its valuations are higher those of the broader market. We suspect this is due to the company’s relatively defensive business as well as its positive longer-term growth prospects. We believe the stock will yield positive returns in the long run.
KPJ paid out roughly half of annual net profit as dividends in the past four years, on average. Assuming a similar payout ratio going forward, dividends are estimated to total 10.7 sen per share in 2011 and 11.3 sen in 2012. That translates into net yields of about 2.5% and 2.6% for shareholders over the two years. Its share will trade ex-entitlement for a third interim dividend of 2.5 sen per share on Dec 28.
Note that the company will receive some 56.6 million units in Al-’Aqar, worth roughly RM64 million at the current unit price of RM1.13, as part payment for the injection of three hospital buildings into the trust. It could distribute these units to shareholders as dividends in specie or sell them on the open market. This is so the company can maintain its stake at less than 50% to keep the REIT’s assets and borrowings off its balance sheet.
The company has some 78.1 million warrants outstanding. The warrants can be converted into ordinary shares at anytime up to January 2015 at an exercise price of RM1.70. At the prevailing price of RM2.54, the warrants are trading at a very slight 1% discount. Assuming full conversion, KPJ’s total share capital will increase to 659.6 million shares, from the current 581.6 million shares.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, December 9, 2011.
