KPJ Healthcare

My Dearest SlowDay,

Here is a snippet from a recent Business Times article, "KPJ Healthcare confident of RM1b turnover this year" (9th May 2007)

• Last year, the group took over Sentosa Medical Centre, Kuala Lumpur, (Sentosa-KL) for RM66.3 million and Sentosa Medical Centre, Kajang (Sentosa-Kajang) for RM5.2 million or a total of RM71.5 million.
  
  The acquisitions, which were completed in the fourth quarter 2006, will see KPJ increase its network to 17 private hospitals in Malaysia, three in Indonesia and one in Bangladesh.

Yes, KPJ Healthcare has acquired more hospitals and from these acquisitions, it would simply mean that there is a very strong possibility that KPJ earns more money in the future.

For me, given such a scenario, I believe it would be nice to know what kind of history KPJ has.

The following table shows KPJ performance for its last four fiscal year.

Fy 20006 numbers in the table above are un-audited numbers. And from the table below, there is ground of reasons to argue that KPJ has shown tremendous growth.

Now KPJ listed its REIT back in Aug last year, in which KPJ disposed several properties for the listing of its REIT, which resulted in some 18.2 million in extra ordinary gains. See the quarterly earnings table below.

So to get a better picture, you probably need to discount the 18.2 million from both tables I had posted.

So let's look at the purchase of Sentosa Medical. The following announcement was taken from Bursa website. KPJ HEALTHCARE BERHAD (215179-P) ("KPJ" OR "COMPANY") PROPOSED ACQUISITION BY KUMPULAN PERUBATAN (JOHOR) SDN. BHD ("KPJSB"), A WHOLLY-OWNED SUBSIDIARY OF KPJ OF 100% OF THE EQUITY INTEREST IN SENTOSA MEDICAL CENTRE SDN BHD ("SENTOSA") COMPRISING 8,692,076 ORDINARY SHARES OF RM1.00 EACH ("SALE SHARES") AND 5,215,239 CUMULATIVE PREFERENCE SHARES OF RM0.10 EACH ("SALE PREFERENCE SHARES") FOR AN AGGREGATE CASH CONSIDERATION OF RM72,000,000 ("PROPOSED ACQUISITION")

The purpose of this exercise is to get a rough understanding the impact of this purchase.

The attached word file in the above announcement is most useful. In it has a table of Sentosa earnings performance. See below.

So for a cash purchse of rm72 million, KPJ was buying Sentosa group of hospitals whose earnings looked rather sluggish. The above table stated that Sentosa's profit after tax earnings for fy 2005 only totals some 2.991 million.

On 8th March 2007, KPJ announced the following. KPJ HEALTHCARE BERHAD ("KPJ" OR "THE COMPANY") MANAGEMENT AGREEMENT ("AGREEMENT") ENTERED INTO BETWEEN KUMPULAN PERUBATAN (JOHOR) SDN BHD ("KPJSB"), A WHOLLY-OWNED SUBSIDIARY OF KPJ AND NEW JEDDAH CLINIC HOSPITAL ("NJCH") AND JEDDAH CLINIC HOSPITAL KANDARAH ("JCHK")

The next day, RHB mentioned the following in its notes.

• Secures Management Contract For Two Private Hospitals In Saudi Arabia
  
  Share Price : RM2.20 Fair Value : RM3.42 Recom : Outperform (Maintained)
  
  􀁘 KPJ Healthcare (KPJ) has secured a 5-year management contract for two private hospitals in Saudi Arabia, namely, New Jeddah Clinic Hospital and Jeddah Clinic Hospital Kandarah, for a fee of RM0.6m per annum.
  
  􀁘 While slightly lower as compared with RM1m per annum KPJ earns from managing the Continental Hospital in Dhaka, this Saudi contract is highly strategic as it opens KPJ up to other markets in the Gulf region.
  
  􀁘 No change in our forecasts as we already assume in our earnings model that KPJ will secure at least two new hospital management contracts in FY12/07.
  
  􀁘 We continue to like KPJ for the strong growth potential of the private healthcare sector in Malaysia on the back of rising affluence and health awareness. To capitalise fully on the sector’s growth potential and strengthen its market position in the sector, KPJ will continue to grow via acquisition as well as greenfield projects.
  
  􀁘 Indicative fair value is RM3.42 based on 14x FY12/07 EPS that is in line with our 1-year forward target PER for the pharmaceutical/healthcare sector. Maintain Outperform.

So it appears to me that KPJ is indeed extremely aggressive. It's acquiring more business in hope of generating more earnings for its shareholders.

However, at this moment of time, I do believe that perhaps it's a bit too early. The earnings table from of Sentosa group of hospitals is just a brief indicator. Perhaps KPJ could manage it in a more profitable manner. Or it could run into trouble. I cannot say for sure.

Perhaps it might be slightly more prudent to wait for another one or two sets of quarterly earnings from KPJ.

Hope these set of second opinions helps!

rgds