KPJ in Johor hospital venture

KPJ Healthcare Bhd

By Affin Research

Add (maintained)

Target price: RM6.82

KPJ Healthcare Bhd has entered into a joint-venture agreement with UTM Holdings to develop and operate a private hospital on a piece of leasehold land in Kulaijaya, Johor.

KPJ will hold 60% of the joint venture (JV) equity, while UTM Holdings will hold the remaining 40%.

UTM Holdings is a wholly-owned subsidiary and commercial arm of University Teknologi Malaysia (UTM), a research university in engineering, science and technology.

The land will be leased from UTM for a period of 30 years with an option for a further lease of 30 years.

KPJ will provide the technical and management services for the construction of the hospital building.

The initial equity investment for the set-up is RM29.9mil, of which KPJ’s portion (60%) of RM17.9mil will be funded internally.

The proposed JV is in line with the group’s objective to increase its hospital networks locally as well as leveraging on UTM’s capabilities in education to lead in the private teaching hospitals within Malaysia.

The new hospital building will have a multi-discipline services and the first phase will be equipped with 150 beds with an estimated total investment of RM128mil.

The development cost will include the land, building and medical equipment. The hospital building will have a maximum capacity of 500 beds.

KPJ had a healthy cash balance of RM291mil and a low net gearing of 0.5x as at June 20, 2013.

The initial investment of RM17.9mil will have minimal impact to the group’s gearing level.

We are positive on KPJ’s organic growth expansion plan, penetrating into new areas with potential demand for private healthcare.

For exposure to the domestic defensive and growing healthcare sector, we continue to like KPJ Healthcare for its sound fundamentals, prudent and organic expansion plans and undemanding valuation in comparison to its peer, IHH Healthcare.

Our target price is unchanged at RM6.82 based on 24x current year 2014 price earnings ratio.

Re-rating catalysts include continuous growth in private healthcare demand in tandem with the growing middle income population, growth in medical tourism, and the group’s continuous expansion programmes.


By Maybank Research

Sell (unchanged)

Target price: 563 baht (RM58.69); 28 baht (RM2.92) after stock split

WE upgrade our new store expansion for Siam Makro plc (Makro) from four to five per year but the change in assumption has marginal impact on the revenue forecast and net profit.

With the slightly higher earnings stream, dividend discount model (DDM) value increases to 663 baht (RM69.12) from 657 baht (RM68.49).

DDM is our previous valuation metric.

However, given that the stock’s free float drops to just 2.2%, we put a 15% liquidity discount to arrive at our fair value of 563 baht (RM58.69) – the new price target.

Note that Makro had a 20 for 1 stock split that had yet to be registered.

On the basis of the new number of shares, Makro’s target price (TP) is 28 baht (RM2.92).

We now assume Makro will open five new trade stores each year instead of four.

Unlike hypermarket operator BigC and other retailers HmPro or CPALL, Makro does not provide guidance on new store opening and only discloses the number when it has all the permits in hand and sites secured.

The key determinant to the number of store opening is the permit (of which Makro has to process many).

In its 25-year history in Thailand, the record number of store opening was 12 in 2007.

In recent years, Makro has been getting better in site and permit acquisitions, resulting in four to five stores opening every year, except in 2008.

Despite razor-thin margins, Makro has thrived because of its strong merchandising management capability and firm grip on its operating expenditure base that became even more crucial when it started to grow the fresh food section to cater to hotels, restaurants and caterers.

The ability to maintain a firm grip on its operations is the reason for the projected rise in returns despite an increasingly competitive market.

Makro’s store operations have no layers of fat that one can trim but a firm merchandising “stamina” and high floor efficiency.

We do not rule out a miracle happening but for the most part we believe that our forecasts reflect Makro’s earnings power that could come strong especially in 2015 when bottomline growth could surge by circa 21% on the maturation of nearly 15 stores which opened from 2010 to 2012.

The new major shareholder of Makro – CPALL is intent on keeping the company’s listing status. (In the interest of keeping sector valuation more efficient, the stock should be delisted to avoid double-counting, but we digress).

Thus, CPALL would have to sell circa 15% of its holding to meet the minimum free float requirement.

Their cost was 787 baht (RM82.04) per share, 25% higher than the Sept 28 closing. To make the “stock” affordable, the par value has been split by 20 and board lot reduced to 50 from 100.

These are cosmetic changes leaving the fact that Makro at 630 baht (RM65.68) is very expensive – 29.3x14 in estimated price earnings.


By RHB Research


Target price: 51 sen

WE initiate coverage on Instacom Group Bhd with a “buy” recommendation and fair value of 51 sen.

The company is a major beneficiary of the rollout of long-term evolution (LTE) networks and universal service provision (USP) projects in Sabah and Sarawak, backed by a decent order book of RM300mil.

Earnings growth is likely to see a new leg-up with the company venturing into the telecommunications infra lease business.

We like Instacom for its good earnings prospects and undemanding valuations.

Instacom is an end-to-end solutions provider for the telecom industry and has all the main players in the local telecom industry, including telecom equipment vendors and state-backed companies, as its customers.

The company aspires to become a telecom infrastructure service provider.

Given its strong market credentials, Instacom is a potential beneficiary of the rollout of LTE services and USP fund projects in Sabah and Sarawak.

It is also looking to venture into the telecom infrastructure leasing market, which offers superior margins.

The company has a sizeable order book of around RM300mil.

We are forecasting financial year 2012 (FY12) to FY14 revenue to grow at a compound annual growth rate (CAGR) of 53%.

Earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to hover around the elevated 20% level while profit margin should remain high at about 17%.

We expect to see strong earnings growth for the company in the next two years (two-year CAGR of 54%).

Key risks to earnings include the growing trend among telcos to share their networks, regulatory and execution risks in the setting up of infrastructure assets, and a slower-than-expected takeup of its services.

We value the stock at a 13x FY14 price earnings. This is based on a 35% discount to the P/E of local mobile operators and regional/global tower-related companies, which trade at about 20x forward P/E.

The discount reflects its significantly smaller operations and share illiquidity.

We like the company for its strong earnings prospects within the telecommunications space as well as its undemanding valuations.

Inari Amertron Bhd

By Affin Investment Bank

Buy (maintained)

Target Price: RM1.70

OVER the past month, we had the opportunity to tour the facilities of two of Inari Amertron Bhd’s up and coming areas of future growth – 51%-owned Ceedtec and Inari South Keytech (ISK) – in Senai, Johor. From a business angle, both are fundamentally worlds apart.

However, each shares a common trait in the form of a major customer, which is an industry leader in the space they compete in. This largely underpins our optimism on the future prospects of both operations.

Ceedtec has been hand-picked to be groomed by Agilent to become a globally competitive player under the Government’s Economic Transformation Programme (ETP).

We are optimistic that Ceedtec will be able to grow to become a RM500mil revenue company in the longer term (from a revenue of just RM13mil) in financial year ending June 30, 2014.

With a strong management team, government incentives and strong products, we believe that execution risk is nominal.

ISK was set up in a collaboration with Avago to venture into leading edge fibre-optic transceivers. In an environment where data demand is experiencing a sharp upward trajectory, underpinned by increasing smartphones and tablets usage, introduction of lower-priced devices, proliferation of social media and over-the-top applications, higher bandwidth requirement would see fibre-optics eventually cascading down to the consumer market.

Coupled with a strong partner, readily available pool of resources and capacity, ISK is set to capitalise on the rapid data, and hence fibre growth explosion in the coming years.

With a three-year earnings compounded annual growth rate (CAGR) of 26%, dividend yields of 6% to 9% and trading at 5.9 times calendar year 2014 earnings per share (EPS), the stock continues to be grossly mis-priced.

This is probably due to its ACE listing status, which has prevented institutional funds from owning the stock. A major re-rating catalyst thus lies on Inari’s Main Market listing transfer, targeted by year-end. As the transfer date draws near, we are inclined to raise our target price-to-earnings multiple to 15 times (from 10 times), thus lifting our target price to RM1.70 (+79% upside) from RM1.11 previously.

On the whole, we like Inari for being leveraged on the market leaders’ growth in their respective fields and also being in the “right segments and at the right time”, which include radio frequency products for the smartphone and tablet markets, transceivers for the high future growth fibre-optic market and test measurement equipment for market leader Agilent.

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