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Macquarine Research 20120910 (SWOT Analysis)
Macquarine Research 20120910 (SWOT Analysis)
KPJ Healthcare
An undervalued healthcare leader
Initiate with Outperform, RM7.10 target price
We initiate coverage of KPJ Healthcare (KPJ), the largest private hospital
network operator in Malaysia (by number of hospitals) with an Outperform
recommendation based on 12-month sum-of-parts target price of RM7.10,
implying 13% upside from current levels and FY13E and FY14E PER of 23x and
20x, respectively. Despite no official dividend policy, we expect KPJ to continue
paying 50% of its net profit on a quarterly basis, which implies a 2.2% FY13E
dividend yield.
Driver 1: Benefiting from the public-to-private switch
Supported by the rise in income and increased acceptance of medical insurance,
private healthcare has become accessible to the public. Private healthcare
KPJ MK Outperform operators like KPJ should also continue to benefit from overcrowded public
Price (at CLOSE#, 05 Sep 2012) RM6.27 hospitals, as more than 80% of the healthcare budget is dedicated to supporting
public hospital operating expenditures. Despite the demand increase, new entry
12-month target RM 7.10 is limited by the zoning requirements implemented by the Private Healthcare
Upside/Downside % 13.2 Facilities and Services Act 1998 which limits the numbers of bed counts within
Valuation RM 5.20-7.60 an area.
- Sum of Parts
GICS sector Driver 2: Growing edge in captive market
Health Care Equipment & Services
Market cap RMm 3,988 Capitalising on its market share advantage, KPJ has been acquiring hospitals
30-day avg turnover US$m 1.3 around the nation to enter new markets while strengthening its number-one
Market cap US$m 1,282 position. By disposing the hospital assets to its associate Al-Aqar Healthcare
Number shares on issue m 636.1 REIT, KPJ is able to unlock part of the investment value upfront while continuing
with its acquisitions, without the need to raise additional funds. Al-Aqar
Investment fundamentals
Healthcare REIT is the only healthcare-focused REIT in Malaysia.
Year end 31 Dec 2011A 2012E 2013E 2014E
Revenue m 1,909.0 2,068.9 2,314.2 2,598.9 Driver 3: The blue-sky scenario – RM7.60 (21% upside)
EBIT m 159.2 179.3 210.0 244.8
EBIT growth % 10.5 12.6 17.1 16.6 There could be more upside to our base-case scenario target price of RM7.10,
Reported profit m 143.7 153.0 178.9 206.8
Adjusted profit m 143.7 153.0 178.9 206.8 as we assume that the three new hospitals beginning operation this year will only
EPS rep sen 26.3 23.2 27.1 31.4 start to positively contribute in 2014. We believe that the scenario could change,
EPS rep growth % 16.5 -11.8 16.9 15.6
EPS adj sen 26.3 23.2 27.1 31.4 as KPJ was able turn around KPJ Kajang within a year of operation. If such a
EPS adj growth % 16.5 -11.8 16.9 15.6 scenario were repeated, we could see potential upside to RM7.60.
PER rep x 23.8 27.0 23.1 20.0
PER adj x 23.8 27.0 23.1 20.0
Total DPS sen 12.0 11.6 13.6 15.7 Driver 4: Historical valuations no longer valid
Total div yield % 1.9 1.8 2.2 2.5
ROA % 8.7 8.8 9.6 10.4 Our implied valuation is demanding compared to KPJ‟s historical average;
ROE % 17.3 15.4 15.7 16.7 however, the stock fundamentals have significantly changed from two years ago.
EV/EBITDA x 12.9 14.1 12.2 10.6
Net debt/equity % 19.1 10.5 8.1 3.8 With JCorp trimming its stake from 81% in 2002 to the current 41% and the
P/BV x 3.8 3.8 3.5 3.2 listing of IHH Healthcare (IHH MK, Not Rated) , liquidity and interest in KPJ stock
Source: FactSet, Macquarie Research, September 2012
have improved significantly. Another rerating catalyst could also be a JV or M&A
(all figures in MYR unless noted) with a Singapore-based medical group providing the potential to gain access to
Analyst(s) Singaporean treatment in Malaysia paid by Medisave.
Chi Hoong Ng
+60 3 2059 8985 chihoong.ng@macquarie.com The Malaysia healthcare stock
Yeonzon Yeow
+60 3 2059 8982 yeonzon.yeow@macquarie.com For investors seeking to invest in the growing Malaysia healthcare market, we
believe that KPJ, with its Malaysia-focused operation and undemanding 23x
10 September 2012 FY13E PER with a 2.2% div yield (vs IHH at 33x consensus FY13E PER with no
Macquarie Capital Securities (Malaysia) dividend upside) is a compelling opportunity.
Sdn. Bhd.
Please refer to the important disclosures and analyst certification on page 2 and the inside back cover of this
document, or on our website www.macquarie.com.au/disclosures.
Macquarie Research KPJ Healthcare
Foreign
12% EPF
11%
(JCorp) in 1981. In 1994, JCorp decided to list KPJ as the first listed healthcare
Source: Company data, Macquarie Research, September group in Bursa, Malaysia. Currently, JCorp owns 45% of KPJ shares.
2012
KPJ MK rel KLCI performance, & rec Key Management and Directors
history
Kamaruzzan Abu Kassim, Chairman
Kamaruzzaman, aged 48, was appointed as a Non-Independent Non-
Executive Director of KPJ on 3 January 2011 and subsequently as Chairman
of KPJ on 12 January 2011. He is currently the President & Chief Executive
Officer of Johor Corporation (JCorp).
Datuk Paduka Siti Sa‟diah Sheikh Bakir, Managing Director
Siti Sa‟diah, aged 59, graduated with a Bachelor of Economics from the
University of Malaya in 1974 and holds an MBA from Henley Management
Note: Recommendation timeline - if not a continuous line, then there was no
Macquarie coverage at the time or there was an embargo period. College, University Reading, UK. Her career with Johor Corporation (JCorp)
Source: FactSet, Macquarie Research, September 2012 commenced in 1974 and she has been directly involved with JCorp's
(all figures in MYR unless noted)
Healthcare Division since 1978.
She was appointed as the Chief Executive of Kumpulan Perubatan (Johor)
Sdn Bhd (KPJSB) from 1989 until the listing of KPJ in November 1994. She
has been the Managing Director of KPJ Healthcare Berhad (KPJ) since 1
March 1993.
10 September 2012 2
Macquarie Research KPJ Healthcare
Fig 2 More inpatients are now seeking medical treatment at private healthcare facilities
2008 2011
Private
26% Private
28%
Public
Public 72%
74%
In our view, the rise in income and acceptance of medical insurance among Malaysians will
help improve affordability and hence increase demand for private healthcare. In addition,
Malaysia is expected to reach an aging population status by 2035 (aging population status is
defined by WHO as one where at least 10% of the population is above the age of 60). As
such, there could be another opportunity for KPJ to offer elderly-care services in Malaysia.
10 September 2012 3
Macquarie Research KPJ Healthcare
There is an investment trend toward high-yielding companies that pay dividends from
strong defensive cash flow, to seek higher returns. We believe KPJ could be an indirect
beneficiary of this investment trend as its 49% owned Al-Aqar could potentially be valued
higher as it has similar earnings stability and dividend payout ratios to telco and consumer
stocks. If valued at 3.50% yield (vs the current yield at 5.2%), it would equate to an
additional 4% upside to our target price.
Fig 3 KPJ trades at 22x FY13E earnings vs regional peers at 21x–30x FY13E earnings
Up/ (Down) Market Div Yield 3-year EPS
Bbg Price Target side cap PER (x) EV/EBITDA (x) (%) CAGR
ticker (lcy) (lcy) (%) Rec (US$m) FY12E FY13E FY14E FY12E FY13E FY14E FY13E (%)
Malaysia
KPJ Healthcare KPJ MK 6.27 7.10 13.2 OP 1,279 27.0 23.1 20.0 14.1 12.2 10.6 2.2 12.9
IHH Healthcare IHH MK 3.11 NR 8,045 43.2 33.1 25.7 24.1 19.9 16.6 0.1 57.8
10 September 2012 4
Macquarie Research KPJ Healthcare
Some may ask why not invest in Thai hospital healthcare operators, which currently trade at a
premium to KPJ but have apparent better growth prospects? In our view, given the
macroeconomic uncertainty, investors may be reluctant to invest in Thai operators as 26-59%
of their revenue comes from foreign patients as opposed to KPJ where foreign patients only
account for 10%. We saw a significant fall in the number of foreign patients visiting Thai
hospitals during the peak of the global financial crisis (2007-2009).
Strength: Weaknesses:
KPJ is a well-established household name in Malaysia Liquidity remains an issue as Johor Corp currently holds a
as it has more than 20 hospitals in the country and been 41% stake in KPJ Healthcare; this is an improvement from
operating for over 30 years. JCorp‟s previous stake of 81% in 2002.
KPJ plans to inject its fully-operational hospitals into its KPJ is operating close to its optimal utilization rate at
associate Al–Aqar Healthcare REIT and rent back these 65–70%; any delay in expansion plans could affect growth
assets through a lease-back agreement. This strategy will prospects.
free up cash flow for capex to help finance future
expansion.
Opportunities: Threats:
10% of KPJ‟s revenue is from the medical tourism As part of the „liberalisation‟ of the private healthcare sector in
segment; KPJ aims to increase this to 25% by working Malaysia, the government has started to allow foreign equity
with the government to further promote medical tourism participation in the set-up of new hospitals. The new foreign
aboard. hospitals may be seen as a threat as they have better
branding and stronger balance sheets.
Despite having a network of 21 hospitals in Malaysia,
KPJ is not part of the 12 hospitals in Malaysia that are Apart from the entry of foreign competitors, Malaysia could
approved by the Singapore government to use CPF also have an additional 17 new private hospitals by 2015,
Medisave in Malaysia. with licence to operate some 4,500 beds (incl. KPJ‟s new
hospitals).
Source: Macquarie Research, September 2012
10 September 2012 5
Macquarie Research KPJ Healthcare
We calculate KPJ‟s terminal value at 10x FY17E EBITDA (one standard deviation above the
two-year historical EV/EBITDA average), which we think better reflects the defensiveness of
the business post the implementation of the Private Healthcare Facilities and Services Act
1998, which came into effect in May 2006.
Despite forecasting EBITDA to double by 2017, we are estimating flat capex estimates at
RM200m as KPJ should continue to maintain its „asset light‟ business model and will likely
dispose the newly built hospital buildings to Al-Aqar Healthcare REIT once they are
operational.
10 September 2012 6
Macquarie Research KPJ Healthcare
Fig 7 Cost of equity and cost of debt assumption for WACC of 8.4%
Cost of equity Cost of debt
Our risk-free rate estimate for WACC is based on the current 20-year Malaysia government
bond yield. There could be more upside potential to our target price as our risk-free rate
assumption at 4.0% could lower further, as the Malaysia 20-year government bond yield has
fallen from 4.07% to 3.92% since the beginning of the year.
Fig 8 DCF sensitivity analysis: WACC and terminal value EV/EBITDA multiples
Terminal EV/EBITDA
DCF Value sensitivity 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x
Fig 9 KPJ P/E trading-band chart Fig 10 KPJ EV/EBITDA trading-band chart
(x) (x)
25 14
+2 Stdev
12 +2 Stdev
20
10
+1 Stdev +1 Stdev
15 8
Average: 11x forward PER Average: 6.3x EV/EBITDA
6
10
4 -1 Stdev
5 -1 Stdev
2
-2 Stdev
-2 Stdev
0 0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: Bloomberg, Macquarie Research, September 2012 Source: Bloomberg, Macquarie Research, September 2012
10 September 2012 7
Macquarie Research KPJ Healthcare
0.0 0 0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bloomberg, JCorp, Macquarie Research, September 2012 Source: Company Data, Macquarie Research, September 2012
We believe it is We do not think that JCorp would look to raise its KPJ stake, despite recently getting help
highly unlikely from the federal government to help guarantee JCorp‟s newly issued debt, intended to
JCorp would refinance its outstanding bonds worth RM3.2bn, which matured in July 2012. During the
increase its KPJ process, JCorp sold RM700m of assets to help close the difference. With JCorp looking to
stake in the short to close the privatisation deal in QSR Brands (QSR MK, Not Rated) and KFC Holdings (M) (KFC
mid term. MK, Not Rated), we believe it is highly unlikely JCorp would increase its stake in KPJ.
2) Improved returns through the listing of Al-Aqar Healthcare REIT
To improve the KPJ‟s cash flow, starting from 2006 KPJ decided to operate under an „asset
light‟ business model by disposing its hospital assets to its associate Al-Aqar Healthcare
REIT. So far, KPJ has sold off 24 hospital buildings to Al-Aqar. We believe the move is
beneficial to shareholders as it unlocks the value of the building while freeing up more cash
flow to help fund KPJ new expansions.
…with room for a further re-rating
The listing of IHH (IHH MK, Not Rated) in Bursa Malaysia and the Singapore Stock
Exchange has raised investor interest in healthcare-related stocks in Malaysia (Fig 14). We
believe the reason for the increase in KPJ interest can be attributed to its similarity to IHH in
the Malaysia healthcare business, with KPJ trading at a discount to IHH. IHH is currently
valued at double the PER multiple of KPJ; although IHH is significantly larger with its
international reach, KPJ is more profitable with a better expected return on asset and equity
(Fig 13).
Fig 13 KPJ is expected to be more profitable than IHH Fig 14 Interest in KPJ picked up post listing of IHH
12
15.0
10
8
10.0
6
4 5.0
2
0 0.0
FY12 FY13 FY14 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
10 September 2012 8
Macquarie Research KPJ Healthcare
KPJ has made an New REIT injection (of two hospitals)? We expect KPJ to inject Pasir Gudang hospital
offer to acquire the building and the New Sabah Medical Centre (SMC) building into Al-Aqar REIT once they are
remaining 49% both operational by the end of the year. KPJ could also recognise a gain from the revaluation
stake in SMC of these assets upon transfer/sale to Al-Aqar REIT, as it is currently being valued at cost on
its balance sheet.
An „official‟ dividend policy Currently KPJ does not have an „official‟ dividend policy, which
could potentially be a concern for yield-searching investors. An official dividend policy should
ease investor concerns on whether management will continue paying 50% of their profits
through dividends.
We are assuming Based on its historical trend, we do expect KPJ to maintain a 50% payout ratio for the full
KPJ will maintain a year with quarterly dividends. We have observed that companies that pay quarterly dividend
50% payout ratio are favoured, as investors are willing to pay a premium for the certainty of payment.
moving forward
Fig 15 KPJ started paying a quarterly dividend Fig 16 KPJ has one of the highest dividend yields
in 2010 among peers for FY12E
3Q 3.0
50.0
2Q 2.5
40.0
1Q
2.0
30.0
1.5
20.0
1.0
10.0 0.5
0.0 0.0
2005 2006 2007 2008 2009 2010 2011 2012 Bangkok Opto KPJ BH Bangkok Apollo *IHH Fortis
Chain Circuits Dusit
KPJ’s div yield at Despite growing at a slower pace than its peers, KPJ is trading at sector-average multiples.
2.2% is 80bps above We think there is limited downside, as at 2.2%, KPJ yield is 80bps above the sector average
industry average of 1.4%. We expect KPJ to continue paying a quarterly dividend as opposed to the industry
norm of a semi or annual dividend.
Fig 17 KPJ trades at 22x FY13 earnings with a quarterly dividend payment
Up/(Down) Market Div Yield 3-year EPS
Bbg Price Target side Rec cap PER (x) EV/EBITDA (x) (%) CAGR
ticker (lcy) (lcy) (%) (US$m) FY12E FY13E FY14E FY12E FY13E FY14E FY13E (%)
Malaysia
KPJ Healthcare KPJ MK 6.27 7.10 13.2 OP 1,279 27.0 23.1 20.0 14.1 12.2 10.6 2.2 12.9
IHH Healthcare IHH MK 3.11 NR 8,045 43.2 33.1 25.7 24.1 19.9 16.6 0.1 57.8
10 September 2012 9
Macquarie Research KPJ Healthcare
Fig 18 KPJ‟s foreign-patient revenue is less than its Fig 19 Bumrungrad Hospital (BH TB) saw an 8% drop
Thai peers in international patients admissions during the GFC
Comparing us to consensus
Fig 20 Our estimates are slightly above the street but we still think they are undervaluing KPJ shares
Net profit (RM mn) EBITDA (RM mn) Depreciation (RM mn) Target price
FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 (RM)
Macquarie 153.0 178.9 206.8 267.7 313.8 361.8 88.4 103.8 117.0 7.10
Consensus 151.2 173.8 205.0 284.6 322.6 371.0 81.6 86.9 99.4 6.46
Source: Bloomberg, Macquarie Research, September 2012
Despite having slightly higher net profit FY12-FY14 (1-3%) estimates compared to the Street,
our EBITDA estimates are 6-8% below consensus. We think this is because the company will
receive a bigger contribution from its associate and lower interest expenses in future years.
The street may be underestimating the value of KPJ, as we believe it is no longer the
company it was several years ago – we have seen KPJ‟s liquidity significantly improve with a
steady quarterly policy.
10 September 2012 10
Macquarie Research KPJ Healthcare
Legislative changes. There is a possible change to the current two-tier healthcare system
such as the 1Care for 1Malaysia plan with the possibility of introducing a British-like
National Health Service (NHS) system in the next two to three years. The implementation
of a new healthcare system could change the risk profile of the stock.
Ability to sell its assets to Al-Aqar REIT. The ability to sell its assets to Al-Aqar REIT is
a key funding source for KPJ, as it enables them to continue their acquisition trail without
further leveraging their balance sheet.
Ability to continue paying dividends. There is a risk that management may deviate from
its current informal system, including lowering the payout ratio or the frequency of the
dividend payments, as the current KPJ management does not have an official dividend
policy.
10 September 2012 11
Macquarie Research KPJ Healthcare
Fig 21 KPJ has one of the most extensive hospital networks in Malaysia
10 September 2012 12
Macquarie Research KPJ Healthcare
Fig 22 More money is spent on private healthcare Fig 23 … but not from the government
2.6 16 8%
2.4 14 7%
2.2 12 6%
2.0 10 5%
1.8 8 4%
1.6 6 3%
1.4 4 2%
1.0 0 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: World Databank, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
Despite having a similar annual budget allocation for the healthcare sector, the recent focus
has been on operating expenditures instead of investing in new hospitals. The Malaysian
government has only allocated 2.5% of GDP towards public healthcare, which is less than the
5-6% of GDP recommended by WHO.
Fig 24 Government needs to start spending on Fig 25 … as only five government hospitals were
healthcare capex, in our view build over the last five years
6 130 37
4 36
125
2 35
0 120 34
2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: MOH, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
More than 60% of the funding through opex is used for medical care payments, while 41% of
capex is used for either building or expanding hospitals. If we were to compare the absolute
amount being spent on new hospital and facilities, it has drop by 35% from RM2.2bn in 2003
to RM1.45bn in 2010.
With fewer hospitals being built, more patients have opted to seek treatment in private
hospitals. We expect this situation to worsen as government has significantly cut its spending
on building new hospitals. Malaysia‟s bed per population is low compared to other countries.
10 September 2012 13
Macquarie Research KPJ Healthcare
a
n
es
a
ei
es
am
nd
na
si
si
pa
or
re
un
at
in
la
hi
ay
ne
n
ap
Ko
Ja
ilip
St
Br
ai
C
et
al
do
ng
0.0
Th
Vi
Ph
M
d
In
Si
te
ni
Source: WHO, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
Given life expectancy expansion and the increasing acceptance of medical, demand for
private healthcare is expected to continue growing. However, for those who can‟t afford
private care, government aid is the only option. The problem is, without the government
stepping up their investment in public healthcare the system will be stretched even further.
Malaysia‟s ageing population (15% of people aged above or expected to reach the age of 60
by 2035) could also provide further opportunity for KPJ to enter into elderly-care services.
KPJ is transferring the knowledge from its elderly-care operations at its recently acquired Jeta
Gardens in Australia, which specialises in this field.
500 27
4.8
15%
400 26
4.6
300 10%
25 4.4
200
5%
24 4.2
100
0 0% 23 4.0
2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: BNM, Macquarie Research, September 2012 Source: MOH, Macquarie Research, September 2012
We believe there is still room for growth in the private healthcare sector, as only 25% of
Malaysian hospital beds are currently operated by private operators. KPJ is the market leader
in the private healthcare segment with 19% market share, followed by IHH (ParkwayPantai)
with 14% market share.
10 September 2012 14
Macquarie Research KPJ Healthcare
Fig 30 Private beds account for only 25% of total Fig 31 KPJ is Malaysia‟s leading private healthcare
beds available provider
60,000 # of beds
KPJ
50,000 19%
11,689 12,216 13,186 13,568
11,637 11,291
40,000
30,000
IHH
20,000 40,057 41,249 41,580 41,483 41,716 14%
38,625
10,000 Others
67%
0
2006 2007 2008 2009 2010 2011
Public Private
Source: MOH, Macquarie Research, September 2012 Source: MOH, Company Data, Macquarie Research, September 2012
10 September 2012 15
Macquarie Research KPJ Healthcare
We believe that the advantage cannot be easily mimicked by its peers, as it requires a
reasonable size of building assets to set up a REIT. The only competitor that could possibly
follow suit would be Parkway Pantai (PPL) which has 11 hospitals with 2,010 beds in
Malaysia, as it recently decided to sell it Gleneagles Medical Centre, Malaysia to its parent
company associate Parkway Life REIT (PREIT SP, Not Rated). With the backing of the REIT,
KPJ should be able to continue with its acquisitions and could possible outbid its competitors
if needed.
10 September 2012 16
Macquarie Research KPJ Healthcare
Some of the recent acquisitions were done at a hefty valuation, which was due to its strategic
location purposes. For example, the Damai Specialist Centre was acquired at 85x PER, but
provided KPJ with a foothold into the Kota Kinabalu (capital of Sabah state) market which
only has three private hospitals and also limits more established competitors from entering
the market.
It is hard to quantify Excluding strategic investments, the valuation for these assets looks reasonable at 14x PER.
the new referral But it is hard to quantify the synergy arising from these acquisitions, as we are unable to
business arising break down the increase in revenues which are due to the new referral business. We view
from these management‟s ability to take advantage of the valuation differences between KPJ assets and
acquisitions the acquired assets as a plus.
(mn)
70 Post acqusition 12%
50 10% 8%
40 5% 6%
3% 4%
30 3% 4%
2%
20 2%
0%
10 0%
0 -2%
2003 2004 2005 2006 2007 2008 2009 2010
Overall some investors might not be comfortable with these acquisitions, but we believe that
management has the execution ability to at least maintain the growth rate of these newly
acquired assets. As scarcity of new hospital land increases, acquisitions will likely be the key
to KPJ‟s future.
10 September 2012 17
Macquarie Research KPJ Healthcare
KPJ aims to Based on KPJ management experience, new hospital within a city area would likely take at
increase its hospital least one to three years before it is able to break even. Despite higher returns on the
count to 30 from 22 greenfield projects, management is inclined to grow through M&A as it provides them with a
by 2015 steady client base and doctors. KPJ aims to increase its hospital count to 30 from 22 by 2015.
10 September 2012 18
Macquarie Research KPJ Healthcare
Fig 36 If yield is all that matters, moves in Al-Aqar‟s stock price could have a positive impact on our target price
Sovereign Debt Yield
Spread to Sovereign 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%
We have seen yield Assuming a more realistic assumption at a 75bps spread to sovereign debt, there would still
compression across be an additional 2% (RM0.11) upside to our current target price. In Malaysia, we have seen
high-yield consumer some yield compression from high-yield consumer names and the telco sector. We believe
names and the telco that the same yield compression scenario could also positively impact Al-Aqar‟s stock price
sector. as it has a similarly stable defensive cash flow.
Fig 37 Telco yield is on the move Fig 38 … same for the consumer sector
7.5% 7.5%
7.0%
7.0%
6.5%
6.5%
6.0%
4.8%
5.5%
6.0%
5.0%
5.5% 5.8%
4.5%
Div Yield div yield
5.0% 4.0%
Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: Bloomberg, Macquarie Research, September 2012 Source: Bloomberg, Macquarie Research, September 2012
10 September 2012 19
Macquarie Research KPJ Healthcare
900 844
797
800 708 724 738
699
700
570 592 595
600 553
519
500
417
400 330 350
300 244 260
200
100
0
Melaka
Putrajaya
Sarawak
Labuan
Pinang
Johor
Selangor
Kedah
Pahang
Sabah
Kelantan
Terengganu
Perak
Perlis
Lumpur
Sembilan
Pulau
Kuala
Negeri
New hospitals can It is highly unlikely for any new hospitals to be approved in Kuala Lumpur and Pulau Pinang
only be built 20km as their bed to population ratio is above the zoning requirement and there aren‟t many new
away from the township development projects that are 20km distance away from an existing hospital.
nearest hospital
Where to build?
Affluent states
Preferably private hospital operators would want to set up at locations where the surrounding
population is affluent. 67% of the total current private hospital beds are located in the top 4
richest states in Malaysia (KL, Pulau Pinang, Sarawak & Selangor) while Kuala Lumpur alone
has 23% of the total capacity.
10 September 2012 20
Macquarie Research KPJ Healthcare
Fig 40 67% of private hospital beds are located in the top 4 richest state
(RM) # of beds
60,000 3,500
50,000 3,000
2,500
40,000
2,000
30,000
1,500
20,000
1,000
10,000 500
0 0
Melaka
Sarawak
Pinang
Selangor
Labuan
Pahang
Johor
Sabah
Kedah
Kelantan
Terengganu
Perak
Perlis
Lumpur
Sembilan
Pulau
Kuala
Negeri
GDP Hospital
Acquisition or Within the 4 states mentioned, we don‟t think any private operators will be able to set up new
expansion of old hospitals in Kuala Lumpur and Pulau Pinang due to the zoning requirements. The only
hospital seems to possibility to increase market leadership in these 2 states would be either through acquisition.
be the only viable
Based on the Associate of Private Hospital of Malaysia (APHM) member list, the number of
way to enter KL and
privately owned and managed hospital in Kuala Lumpur is 26 and Pulau Pinang is 14.
Pulau Pinang
States with sizable population
Major hospital By 2020, the Malaysia government hopes to raise the GNI (gross national income) per capita
players will have to RM48,000. If the plan succeeds, affordability for private healthcare system should improve.
new hospital We expect more private healthcare groups to take advantage of it by setting up more
operating in KV or hospitals in the greater Klang Valley (KV) in Selangor and Kuala Lumpur and Iskandar
IDR within the next 3 Development Region (IDR) in Southern Johor.
years
('000)
6,000 Population (LHS) # of hospitals (RHS) 70
5,000 60
50
4,000
40
3,000
30
2,000
20
1,000 10
0 0
Melaka
Putrajaya
Sarawak
Selangor
Labuan
Johor
Sabah
Kedah
Pinang
Kelantan
Pahang
Terengganu
Perak
Perlis
Lumpur
Sembilan
Pulau
Kuala
Negeri
Pantai Parkway, KPJ and Thomson Medical Centre each has a hospital opening within the
next 3 years in either KV or IDR to take advantage of the rising population in those area.
10 September 2012 21
Macquarie Research KPJ Healthcare
Fig 42 Malaysia medical tourism market in small compare to its regional peer
(US$ mn)
1,400
1,200 1,145
1,000
800
628
600
400
170
200
0
Malaysia Singapore Thailand
We believe that Malaysia‟s hospitals are less competitive in this segment due to:
Accreditation
Branding
Accreditation
The main consideration for most patients when they are seeking treatment abroad is better
affordability without compromising on quality and care standards. Despite having a similar
pricing structure with Thailand, Malaysia hospitals are not competitive in attracting medical
tourists. We believe this is due to the lack of accredited hospitals and branding.
10 September 2012 22
Macquarie Research KPJ Healthcare
As of June 2012, there are only 6 Joint Commission International (JCI) accredited hospitals in
Malaysia, while there are 18 and 13 JCI accredited hospitals in Thailand and Singapore,
respectively.
Fig 44 Malaysia still need to build/upgrade more hospitals that adhere to the JCI standard
12
10
8
6
6 5
4
4
2
0
Thailand Singapore Malaysia Indonesia Philippines
JCI is the gold standard for healthcare quality and patient safety, and is the basic requirement
to be part of provider network for US-based health insurance. To help monetise the
government effort in promoting medical tourism, KPJ will likely look to increase the number of
JCI accredited hospitals from its current one hospital.
Branding
The setting up of the Malaysia Healthcare Travel Council (MHTC) as a one-stop info centre
for patients is a crucial step, as more marketing activities are needed to expose foreigners to
the possibility of seeking treatment in Malaysia. The medical tourism industry in Thailand did
an exemplary job of promoting itself through a segment on CBS: 60 minutes, a popular US
TV show.
To better cater to the medical tourism market, Thai hospitals like Bumrungrad International
Hospital have remodeled their lobby after a hotel lobby to better reflect their image as a
medical tourism hospital as opposed to a traditional hospital. For KPJ to be successful in this
segment, it would have to come up with a differentiation strategy aside from just compete in
pricing.
Singapore medisave, 1 conquer more to go
To improve the medical affordability in Singapore, Singapore government have allowed
patients to use Medisave (CPF) to pay for private care in 12 Malaysia hospitals. Before opting
for Malaysia hospitals, patients are required to be referred by the groups‟ Singapore centre
first. Cheaper medical cost in Malaysia is benefiting patients seeking treatment in Malaysia
as opposed to Singapore. The announcement is an early victory for the Malaysia medical
tourism segment, but more work is still needed to be done to attract patients from other
countries. In 2008, Singapore spent about S$10.2 bn on healthcare.
10 September 2012 23
Macquarie Research KPJ Healthcare
Health Management International Balestier Clinic and Health Screening Centre Regency Specialist Hospital (Johor Baru)
Mahkota Medical Centre (Malacca)
Parkway Holdings East Shore Hospital Gleneagles Intan Medical Centre, Kuala Lumpur
Pantai Hospital, Kuala Lumpur
Pantai Hospital, Cheras
Pantai Hospital, Ampang
Pantai Hospital, Klang
Pantai Hospital, Ipoh
Pantai Hospital, Ayer Keroh
Pantai Hospital, Penang
Pantai Hospital, Batu Pahat
Pantai Hospital, Sungai Petani
Source: Bloomberg, Macquarie Research, September 2012
Despite owning the largest hospital network in Malaysia, KPJ did not qualify to be part of the
panel of approved hospitals as they do not have a partner in Singapore, which is the rule
imposed by Medisave. We think it is important for KPJ to be part of the panel as it would help
to build a track record as a preferred medical tourism hospital.
Overall more effort and work still needs to be done by the Malaysian hospitals and KPJ if they
wish to break into the lucrative medical tourism segment.
10 September 2012 24
Macquarie Research KPJ Healthcare
Revenue m 1,055 1,014 1,113 1,201 Revenue m 1,909 2,069 2,314 2,599
Gross Profit m 315 331 349 385 Gross Profit m 602 647 734 835
Cost of Goods Sold m 740 683 764 816 Cost of Goods Sold m 1,307 1,422 1,580 1,764
EBITDA m 131 136 157 157 EBITDA m 229 268 314 362
Depreciation m 37 52 50 54 Depreciation m 70 88 104 117
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 94 85 107 103 EBIT m 159 179 210 245
Net Interest Income m -8 8 -1 2 Net Interest Income m -9 -1 2 2
Associates m 17 24 16 28 Associates m 55 40 44 49
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0
Pre-Tax Profit m 103 116 123 134 Pre-Tax Profit m 205 219 256 296
Tax Expense m -25 -29 -33 -31 Tax Expense m -50 -55 -64 -74
Net Profit m 77 87 90 103 Net Profit m 154 164 192 222
Minority Interests m -9 -2 -11 -3 Minority Interests m -11 -11 -13 -15
EPS (rep) sen 10.3 12.9 12.0 15.2 EPS (rep) sen 26.3 23.2 27.1 31.4
EPS (adj) sen 10.3 12.9 12.0 15.2 EPS (adj) sen 26.3 23.2 27.1 31.4
EPS Growth yoy (adj) % -2.2 -18.3 15.9 17.8 EPS Growth (adj) % 16.5 -11.8 16.9 15.6
PE (rep) x 23.8 27.0 23.1 20.0
PE (adj) x 23.8 27.0 23.1 20.0
EBITDA Margin % 12.4 13.5 14.1 13.1 Total DPS sen 12.0 11.6 13.6 15.7
EBIT Margin % 8.9 8.4 9.6 8.6 Total Div Yield % 1.9 1.8 2.2 2.5
Earnings Split % 44.5 55.5 44.1 55.9 Weighted Average Shares m 546 660 660 660
Revenue Growth % 16.1 1.4 5.5 18.5 Period End Shares m 546 660 660 660
EBIT Growth % 12.4 12.9 13.1 21.6
Profit and Loss Ratios 2011A 2012E 2013E 2014E Cashflow Analysis 2011A 2012E 2013E 2014E
Revenue Growth % 15.4 8.4 11.9 12.3 EBITDA m 229 268 314 362
EBITDA Growth % 12.5 17.0 17.2 15.3 Tax Paid m -50 -55 -64 -74
EBIT Growth % 10.5 12.6 17.1 16.6 Chgs in Working Cap m 15 -41 -9 -10
Gross Profit Margin % 31.5 31.3 31.7 32.1 Net Interest Paid m -30 -26 -26 -26
EBITDA Margin % 12.0 12.9 13.6 13.9 Other m 99 67 95 103
EBIT Margin % 8.3 8.7 9.1 9.4 Operating Cashflow m 263 213 310 355
Net Profit Margin % 8.1 7.9 8.3 8.5 Acquisitions m 79 0 0 0
Payout Ratio % 45.6 50.0 50.0 50.0 Capex m -140 -200 -200 -200
EV/EBITDA x 12.9 14.1 12.2 10.6 Asset Sales m 0 0 0 0
EV/EBIT x 17.0 19.8 17.1 14.8 Other m -159 0 0 0
Investing Cashflow m -219 -200 -200 -200
Balance Sheet Ratios Dividend (Ordinary) m -63 -76 -89 -103
ROE % 17.3 15.4 15.7 16.7 Equity Raised m 32 127 0 0
ROA % 8.7 8.8 9.6 10.4 Debt Movements m 43 -37 -17 -8
ROIC % 11.3 11.3 11.8 12.9 Other m 0 0 0 0
Net Debt/Equity % 19.1 10.5 8.1 3.8 Financing Cashflow m 11 13 -106 -112
Interest Cover x 16.9 256.1 nmf nmf
Price/Book x 3.8 3.8 3.5 3.2 Net Chg in Cash/Debt m 55 26 4 43
Book Value per Share 1.6 1.7 1.8 2.0
Free Cashflow m 123 13 110 155
10 September 2012 25
Macquarie Research KPJ Healthcare
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform – return >3% in excess of benchmark return price movements. adjustments made:
Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for
Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense
Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends &
yield minority interests
Macquarie – Asia/Europe High – stock should be expected to move up or
Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets
Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average
Medium – stock should be expected to move up total assets
Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation
Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average
Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial
Underperform – return >5% below benchmark return * Applicable to Australian/NZ/Canada stocks only Reporting Standards).
Macquarie - USA Recommendations – 12 months
Outperform (Buy) – return >5% in excess of Russell Note: Quant recommendations may differ from
3000 index return Fundamental Analyst recommendations
Neutral (Hold) – return within 5% of Russell 3000 index
return
Underperform (Sell)– return >5% below Russell 3000
index return
10 September 2012 26
Macquarie Research KPJ Healthcare
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10 September 2012 27
Asia Research
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