KPJ enjoys IHH IPO spillover effect
KPJ HEALTHCARE BHD By Affin Investment Bank Buy (maintain) Target price: RM6.44 OVER the past six months, KPJ’s share price has performed exceedingly well, rising by 35% and closing the gap to our fair value of RM6.44. Apart from the stock’s highly defensive nature, we believe the positive share price performance has also been triggered by the spillover effect from the recent listing of IHH Healthcare.
At current price level, KPJ is trading at 19.5 times calendar year (CY) 2013 price to earnings ratio (PER) and 11.7 times EV/EBITDA (enterprise value and earnings before interest, taxes, depreciation and amortisation ratio), which is still below the industry average of 26 times and at a steep discount to IHH’s valuation of 42 times CY 2013 PER and 15.5 times financial year (FY) 2013 EV/EBITDA.
For 2012, we have factored in a moderate 8% growth in the number of outpatients, a modest assumption compared to the 13% outpatient growth registered in FY 2011. Similarly, for inpatients, we factored in a moderate 4% growth in 2012 and 5% growth thereafter, which is modest compared to its 4-year historical average growth of 9%. Given the group’s ongoing expansion plans and occupancy rate of 70%, we believe there is upside potential to our earnings forecasts. Based on our simulation, for every 1 percentage point increase in outpatient and inpatient growth, our earnings forecast would be raised by 0.6%-1.7% per annum.
KPJ Healthcare has opened KPJ Klang with an initial 30 beds this year. The hospital has a capacity for 150 beds. We gather that KPJ Pasir Gudang is on track for completion by the fourth quarter with a bed capacity of 120 beds. Recently, the group has finalised the acquisition of the remaining 49% stake in SMC Healthcare from Sabah Medical Centre for RM54.8mil which will be paid through internal funds.
We are upbeat on KPJ’s ongoing expansion, as it allows the group to capture the growing middle-income population and also the rising demand for private healthcare. KPJ is also well positioned to capture the growing market of medical travellers. The Malaysia Health Tourism Council and Association of Private Hospitals Malaysia estimate the number of medical travellers to grow by a compound annual growth rate of 14% to 1.1 million travellers in five years (2011 to 2016).
Despite an annual capital expenditure of RM200mil for its expansion programme, we expect KPJ to continue generating positive free cash flow of about RM50mil to RM100mil a year. The group has a healthy cash balance of about RM200mil and a very low gearing of 0.2 times. As such, we believe KPJ is able to maintain its dividend payout ratio of about 35% which translates into a net yield of 2%.
Pending its second quarter results this month, we maintain our forecasts at this juncture, but with an upward bias. For exposure to the domestic defensive and growing healthcare sector, we continue to like KPJ Healthcare for its sound fundamentals, ongoing expansion plans and undemanding valuation in comparison to its peer IHH. Our target price is unchanged at RM6.44 based on 20 times CY 2013 PER. GAS MALAYSIA BHD By CIMB Research Outperform Target price: RM2.84 FOR the financial year ending Dec 31, 2012 (FY12), first half earnings were broadly in line at 53% of our FY12 forecast and 51% of consensus numbers. While volumes rose by 2% year-on-year, lower regulated margins led to a 33% drop in core earnings per share. With capital expenditure peaking in FY12, we believe the company could raise its dividend payout ratio.
We raise our FY13 to FY14 dividend payout assumptions from 75% to 90%, resulting in a slight cut in core earnings due to lower interest income. However, our net yield rises by 60 basis points. Maintain Outperform with an unchanged dividend discount model (DDM) target (discount rate: 6%, terminal growth: 2%). As expected, no dividend per share was declared.
FY12 first half revenue rose by 8% year-on-year to RM1bil, on the back of a 2% increase in natural gas volumes and higher selling prices. Operating costs rose by 21% due to higher regulated purchase price for natural gas. As a result, EBITDA dropped by 40% and EBITDA margins contracted by 9.2 percentage points to 11.6%. At the same time, core net profit fell by 44% to RM75mil. We expect a weaker second half due to higher expenses as it expands its pipelines.
Although the pricing of imported gas is not yet final, Gas Malaysia management has been proactive in securing accounts through pre-gas service agreements (GSA) for the additional 40 million std cu ft day (mmscfd) it is contracted to buy from Petronas in 2013.
Despite what could be a 300% increase in selling prices, Gas Malaysia has already secured 67% of the incremental supply through these contracts. This is a signal that customers can pay market prices for gas, and we believe Gas Malaysia will be able to secure the balance supply.
While management is committed to paying out at least 75% of its profits as dividends (FY13 onwards), we think the company can pay more. FY12 will be Gas Malaysia’s peak capital expenditure year at RM140mil. This falls to RM40mil annually on a more steady basis from FY13-FY14. Also, volume growth in Malaysia is expected to be in the single digit and above-trend growth is not likely. PADINI HOLDINGS BHD By JF Apex Securities Hold (downgraded) Target price: RM2.09 PADINI has sealed an exclusive 10-year deal with Singapore’s FJ Benjamin Group to distribute Vincci women’s shoes and accessories in Indonesia. Under the agreement, FJ Benjamin will through its associate PT Gilang Agung Persada open a total of 25 stores within five years in Indonesia.
We are positive on the deal as it enables Padini to stretch its foothold to Indonesia. We reckon that ventures into Indonesia with its large population of over 240 million would propel the group’s future earnings growth. We also believe the Vincci brand which is fashionable yet affordable should be well received by the Indonesian consumers.
We are upbeat on FJ Benjamin helping Padini to build a strong reputation for its Vincci brand in Indonesia, banking on its status as Singapore’s leading fashion retailer with a 53-year track record and has a retail network of more than 190 stores.
We think the deal would not contribute significantly to the group’s FY2013-2014 earnings as the 25 new stores would only be opened within five years. We expect minimal earnings contribution of less than 1% from the deal for FY2013-2014.
Yet, we expect greater earnings contribution from the Indonesian ventures of less than 2% from FY2015 onwards. We reckon the venture into Indonesian market would require gestation period of two to three years before the group can reap greater market share in Indonesia.
We maintain our earnings forecast for FY2013-FY2014 at this moment pending further details from management. Weexpect Padini Holdings earnings for FY2013FY2014 would not be much affected by the deal.
Downgrade to hold with a higher target price of RM2.09, pegged at higher price to earnings ratio of 13.5 times FY2013 earnings per share in view of its rosy long-term prospect by venturing into Indonesia. We advise investors to accumulate the stock at a lower entry price of RM1.90 as the current share price offers limited upside after having appreciated 36.5% since our initiation coverage report and we believe the current share price has run ahead of its fundamental. We like the stock for its robust earnings growth and its defensive business model.