KPJ is selling its aged care business in Australia for RM2m. We are positive on the divestment which is in tandem with the group’s strategy to review its loss-making operations and investments. Pending the completion of the deal, we maintain our earnings forecasts, TP of RM1.56 and OUTPERFORM call.

Divestment of aged care business in Australia removes drag on earnings. KPJ’s 57.2%-owned Jeta Gardens is selling its aged care business in Australia for AUD0.7m (RM2m) to DPG Services Pty Ltd. As part of the deal, the buyer will assume all liabilities totalling RM49.7m. The proposed disposal encompasses specific assets and liabilities associated with the operation of residential aged care services at Jeta Gardens Aged Care Facility. The divestment is expected to be completed by 1QCY24. We are positive on this divestment which is in tandem with the group’s strategy to review its non-core operations and investments which has been a drag on earnings over the past few years. In its 9MFY23, Jeta Gardens Group registered a loss of RM7m. Moreover, by removing the underperforming aged care business, KPJ can reduce its operating costs and cash flow requirements.

Impact to financial. For illustration purposes, impact to financial are as follow: - (i) the absence of RM5.1m net loss (annualised 9MFY23 loss of RM7m assuming Aged Care Business accounts for 97% of losses and KPJ’s 57.2% stake) is expected to raise FY24F net profit by 2%, (ii) the expected proforma net gain on extinguishment of net liabilities arising from the proposed disposal amounts to RM10.8m is attributable to KPJ, and (iii) KPJs’ net asset per share is expected to rise from RM0.51/share to RM0.52/share.

Outlook. We project KPJ’s patient throughput to grow 14% in FY23 (vs. 12% in FY22), and BOR of 71% (vs. 58% in FY22) as the demand for private healthcare services resumes its growth path post the pandemic. Additionally, we believe 4QFY23 could potentially be boosted by a lower effective tax rate. Recall, the group, typically utilised its tax benefits arising from unutilised capital allowances and tax losses for new businesses under gestation and recognition of tax allowances in 4Q.

We keep our earnings forecasts unchanged pending the completion of the deal. Our TP is RM1.56 based on 28x FY24F EPS, in line with its regional peers. There is no adjustment to TP based on ESG given a 3- star rating as appraised by us (see Page 4).

We continue to like KPJ for: (i) the bright prospects of the private healthcare sector in Malaysia underpinned by rising affluence and ageing population, (ii) its strong market position locally with the largest network of 29 private hospitals (vs. only 16 of IHH in the second place), and (iii) it is poised for an earnings upcycle (having emerged from an investing upcycle) with two of its new hospitals having turned EBITDApositive while another two only recorded small operating losses. Reiterate OUTPERFORM.

Key risks to our call are: (i) regulatory risk, (ii) the lack of political will to roll out a national health insurance scheme, and (iii) longer-than-expected gestation periods for its newer hospitals.

Source: Kenanga Research - 14 Dec 2023