KPJ Healthcare Bhd is a major recipient of the anticipated growth in demand for private healthcare services in Malaysia.
Analysts concur that there would be more room for growth in healthcare spending in Malaysia, which is 3.4% of the total gross domestic product last year against 8.6% for OECD countries and 15.2% in the United States.
Deutsche Bank, in its latest note dated April 9, has initiated a buy call on KPJ with a 12-month target price of RM3.80, given the group's steady earnings growth and favourable industry dynamics.
Key catalysts for the stock will be the delivery of strong quarterly earnings and increased foreign attention on small-cap stocks in Malaysia versus large cap stocks due to the valuation gap, it added.
Deutshe Bank said KPJ was the cheapest healthcare stock in the region.
We believe the sharp discount to its share price is unwarranted and the stock deserves a re-rating because investors are now buying into an enlarged group, a healthier balance sheet and a more aggressive expansion plan compared with five years ago, it said.
KPJ's major shareholder Johor Corp is also seen to be gradually reducing its stake from 72.4% at end of 2005 to 52.9% currently. This will improve the liquidity of the stock.
One real risk is a decline in purchasing power due to an economic slowdown, which may lead to lower-than-expected number of patients visits and admissions as well as lower utilisation rates of medical facilities.
RHB Research, in its note dated March 1, maintained an outperform recommendation on KPJ with a target price of RM3.42. To capitalise fully on the sector's growth potential and strengthening of its market position, KPJ will continue to grow via acquisitions and green field projects, it said.
RHB Research views KPJ's management contract for two private hospitals in Saudi Arabia as highly strategic because it would open KPJ to other new markets in the Gulf region.
Credit Suisse also has an outperform call on KPJ. It said the group was a clear candidate for further upward re-rating. Its dividend payout of 48% also translates into an attractive dividend yield.
We also raise our financial year 2007 to 2008 earnings per share forecasts by 6% to 12% due to higher sales growth assumptions, it added.