KPJ announced on Friday that the Group had been ordered by the Johor Bahru High Court to pay RM70.5m in damages in relation to a civil case filed by Hospital Penawar‟s chairman and managing director. The news comes as an unpleasant surprise as the Group had not disclosed any ongoing litigation in its financial reports. We understand from the management that no provisions have been made for the claims. Meanwhile, the Group is filing for a stay in execution and appealing against the judgment.

Litigation details. Hospital Penawar chairman Dr Mohd Adnan Sulaiman and managing director Azizan Sulaiman filed a civil case claiming damages from KPJ for breaching a joint venture agreement between the two hospitals after KPJ set up a hospital in Pasir Gudang, less than 1km from Hospital Penawar. The JV agreement, signed on May 30, 1995, stated that KPJ would own a 30% stake in Hospital Penawar in return for its expertise and resources for the mutual benefit of both parties. The High Court Justice ruled that KPJ‟s action breached the terms of the agreement and hence ordered the Group to pay RM70.5m in damages to Hospital Penawar, in addition to RM150,000 for legal costs.

No provision made. We understand from the management that the Group has not made any provisions for the damages claimed by Hospital Penawar. The Group is currently filing for a stay in execution while it appeals against the judgment. The lack of provision is a cause for concern, as the amount represents approximately 50% of the Group‟s annual net profit. Should the Group lose in its appeal, there will be grave implications for its FY13 bottomline.

Maintain Neutral with unchanged TP of RM6.50. We are keeping our earnings forecast unchanged pending further developments in the litigation. While a negative judgment could cause the share price to plummet, we believe the Group‟s long term fundamentals are still very much intact. Valuations however are rich at current price levels, hence we maintain our Neutral call with unchanged TP of RM6.50, implying FY14 PE of c.26x.

Source: PublicInvest Research - 29 Jul 2013