KPJ intends to spin off HQ building into a REIT

KPJ Healthcare Bhd
(June 27, RM3.30)
Maintain neutral with target price of RM3.62:
We met up with the management of KPJ for updates, and opine that the tide may be turning for the group as business at its new hospitals picked up pace and margins improved on the back of fee revisions in the latter part of last year.

Operational performance at the KPJ Klang Specialist Hospital (KKSH) improved significantly, achieving an average occupancy rate of 71% in financial year 2013 ended Dec 31 (FY13) with 90 beds. The group plans to increase the hospital’s capacity by another 30 beds this year, and is hopeful that it will break even by the end of this year. KPJ Rawang Specialist Hospital, which opened early this year, has an average occupancy rate of 50%, benefiting from a ready catchment area in the surrounding townships and industrial park with no other major competitors in the immediate vicinity.

We understand that KPJ intends to spin off Menara 238 in Kuala Lumpur, which houses the group’s headquarters, into a real investment investment trust (REIT) once the building is fully tenanted. Recall that the 36-storey Menara 238 was acquired at a price of RM206 million in October 2013. While the current occupancy rate remains low at 20%, management is optimistic about its prospects as it is in the midst of negotiations to lease out the remaining office space to a potential tenant.

Hospitals meanwhile will not be able to impose the impending goods and services tax (GST) on patients for medical treatment as healthcare is GST-exempted. However, medical supplies and drugs procured by hospitals are subject  to the GST, thus translating to higher costs for healthcare providers.

We understand that the group, together with other industry players, are negotiating with the government on reducing the impact of the GST on costs, although the outcome is still unknown.

Nonetheless, we believe KPJ will not bear the full brunt of the costs and they are likely to be passed on to patients in the form of higher fees.

We are keeping our estimates unchanged as we believe the group is on track to achieve our projected earnings. While cost efficiencies have improved, the impact will be somewhat tempered by higher interest expenses and start-up costs from the Maharani Specialist Hospital which opened in June.  

Hence we maintain our “neutral” call on KPJ with target price of RM3.62 based on 30 times FY15 price-earnings ratio.  — PublicInvest Research, June 26

This article first appeared in The Edge Financial Daily, on June 27, 2014.

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