Kenanga maintains Underperform on KPJ

KUALA LUMPUR: Kenanga Research has maintained its Underperform on KPJ Healthcare with a target price of RM3.31 based on unchanged 27 times FY15 earnings per share.

It said in a note on Tuesday that the stock is currently trading at PERs of 34 times for FY14E and 32 times for FY15Em which appears rich given its average net profit growth of 15% anually over FY14E and FY15E.

It said KPJ's unit Puteri Nursing College Sdn Bhd has proposed to sell two parcels of freehold land and a building to 49%-owned AL-`Aqar Healthcare REIT for RM77.8mil cash and or part by issuance of new units in Al-`Aqar. Upon completion of the proposed disposal, KPJ will lease the building back.

The proposed disposal will net an estimated gain of RM16.8mil or 1.6 sen/share for KPJ, it said.

It added that the exercise would unlock the value of the properties, realise an estimated gain on disposal and raise fund for its working capital. 

The proceeds from the disposal would be used for repayment of borrowings (RM30mil), working capital (RM8.3mil) and expenses (RM0.6mil). 

"However, note that the RM30mil repayment of borrowings is only a drop in the ocean against KPJ’s total borrowings of RM1.2bil as at Sept 23, 2014 which is expected to be stretched due to its 
future expansion plans. 

"We maintain our earnings forecast since the savingsfrom depreciation and borrowing cost will be offsetby rental costs from leasing back the buildings," it noted.

Looking into FY15, Kenanga said KPJ is targeting to open KPJ Perlis and KPJ Pahang Specialist. 

"Additionally, KPJ is incurring higher staff costs due to the gradual addition of more beds since it needs to maintain a certain required ratio of staff per hospital, and KPJ employing more staff in its headquarters to supportits on-going projects. 

"We expect start-up losses from Sabah, Muar and Rawang to drag down earnings upon commencement due to the typical gestation period averaging between two to three years," it said.