Public Invest Research maintains Neutral on KPJ Healthcare

KUALA LUMPUR: Public Invest Research is maintaining its Neutral recommendation on KPJ Healthcare but with a lower target price of RM3.38.

“We are reducing our FY13-FY15 net profit forecast by 11% to 23% to account for higher losses to be incurred by new hospitals coming on board,” it said on Tuesday.

Public Invest Research also adjusted its target price to account for the recent bonus issue and rights issue with free warrants, resulting in a lower TP of RM3.38 (from RM4 ex-all previously) based on 30 times FY14 price-to-earnings ratio (PER).

“In the face of mounting cost pressures, we believe it is imperative for the Group to rationalise operations and manage its ballooning administrative costs. Maintain Neutral as their success on this front remains to be seen,” it said.

To recap, the research house recently met up with KPJ’s management for updates on KPJ’s ongoing projects and recent challenges.

It said the group is facing increasing cost pressures, including staff expenses, higher electricity tariffs and gestation costs from new hospitals.

On the three new hospitals, they were on schedule to start operations in 2014.

KPJ Rawang Specialist Hospital is scheduled to be opened next month with 60 beds in the first phase, while the Muar Specialist Hospital is expected to commence operations in 2Q14 with 60 beds.

“The management is cautiously optimistic of these two hospitals’ ability to achieve breakeven level faster than its blighted KPJ Bandar Baru Klang Hospital, due to a lack of private competitors and ready catchment area from surrounding townships.

“We do believe however that the first year of operations will add to gestation costs which currently amount to RM40mil per annum. The 250-bed Sheikh Mujibur Rahman Memorial KPJ Specialist Hospital in Bangladesh is also scheduled to be opened in 1Q14, albeit with the Group only bearing operating costs (comprising mainly staff costs) while it operates lease-free for the first five years. As such, we believe losses will be capped to a certain extent,” it said.

As for the new Sabah Medical Centre (SMC), it began operations at the end of 2013, after a one-year delay due to construction issues.

Public Invest Research said this resulted in more costs in FY13 as the Group had to maintain manpower strength for 90 beds while operating a mere 47 beds leased from the government.

“The new SMC is profitable from day one, being an expansion of existing operations, and the group expects to ramp up its capacity to 90 beds this year - from 60 beds in phase one of the initial opening – which would drive earnings growth to mitigate gestation losses from its other new hospitals,” it pointed out. 
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