KPJ (5878) - KPJ Healthcare - Note from Invest Malaysia 2015
Target RM4.20 (Stock Rating: HOLD)
The main takeaway about KPJ Healthcare from Invest Malaysia 2015 (IM15) is that it is committed to expanding its number of hospitals and bed capacity in Malaysia, even though that will result in lower earnings in the near term. Capacity expansion is the group’s number one priority as it is confident that demand for private hospital services in Malaysia will continue to grow rapidly, driven by rising domestic demand and medical tourism. The information we gathered during the conference was largely in line with our expectations. There are no changes to our earnings forecasts, Hold recommendation and SOP-based target price.
What Happened
KPJ's presentation at IM15 drew more than 60 fund managers and buy-side analysts. Group President & Managing Director Dato’ Amiruddin Abdul Satar gave a thorough explanation about the group's business and its growth ambitions. The questions from the audience were mostly related to its expansion plans. During the conference, KPJ reiterated that it is committed to growing its hospital network and bed capacity, and expected the new hospitals to incur losses in the first three years of operations. While this will drag its overall earnings lower in the near term, management believes that continued expansion will pay off in the long term. It has budgeted about RM770m and RM610m of capex for new hospitals and additional bed capacity in existing hospitals, respectively, to be spent over the next few years. Once the new expansion fully comes on stream, it will more than double KPJ’s current bed capacity. New bed capacity will allow KPJ to cater to more local patients and medical tourists.
What We Think
We concur with the group’s aggressive expansion strategies to realise its growth potential. As investment in hospitals has a long payback period, it makes sense to expand aggressively as the current cost of capital is low. On top of that, aggressive expansion in Malaysia will create barriers of entry for competitors due to the government’s zoning policy, which sets the limit of one private hospital within a certain radius. To fund these expansions, we gathered that KPJ will increase its borrowing and may review its dividend policy.
What You Should Do
Should KPJ lower its dividend payout, we believe this will not significantly affect its share price as it is a growth stock. Nonetheless, we maintain our Hold recommendation as its CY16P/E of 33x is largely in line with its regional peers.
Source: CIMB Daybreak - 24 April 2015
Target RM4.20 (Stock Rating: HOLD)
The main takeaway about KPJ Healthcare from Invest Malaysia 2015 (IM15) is that it is committed to expanding its number of hospitals and bed capacity in Malaysia, even though that will result in lower earnings in the near term. Capacity expansion is the group’s number one priority as it is confident that demand for private hospital services in Malaysia will continue to grow rapidly, driven by rising domestic demand and medical tourism. The information we gathered during the conference was largely in line with our expectations. There are no changes to our earnings forecasts, Hold recommendation and SOP-based target price.
What Happened
KPJ's presentation at IM15 drew more than 60 fund managers and buy-side analysts. Group President & Managing Director Dato’ Amiruddin Abdul Satar gave a thorough explanation about the group's business and its growth ambitions. The questions from the audience were mostly related to its expansion plans. During the conference, KPJ reiterated that it is committed to growing its hospital network and bed capacity, and expected the new hospitals to incur losses in the first three years of operations. While this will drag its overall earnings lower in the near term, management believes that continued expansion will pay off in the long term. It has budgeted about RM770m and RM610m of capex for new hospitals and additional bed capacity in existing hospitals, respectively, to be spent over the next few years. Once the new expansion fully comes on stream, it will more than double KPJ’s current bed capacity. New bed capacity will allow KPJ to cater to more local patients and medical tourists.
What We Think
We concur with the group’s aggressive expansion strategies to realise its growth potential. As investment in hospitals has a long payback period, it makes sense to expand aggressively as the current cost of capital is low. On top of that, aggressive expansion in Malaysia will create barriers of entry for competitors due to the government’s zoning policy, which sets the limit of one private hospital within a certain radius. To fund these expansions, we gathered that KPJ will increase its borrowing and may review its dividend policy.
What You Should Do
Should KPJ lower its dividend payout, we believe this will not significantly affect its share price as it is a growth stock. Nonetheless, we maintain our Hold recommendation as its CY16P/E of 33x is largely in line with its regional peers.
Source: CIMB Daybreak - 24 April 2015
