This article first appeared in The Edge Financial Daily on January 25, 2018 - January 31, 2018

KPJ Healthcare Bhd
(Jan 24, 97.5 sen)
Maintain buy with an unchanged target price of RM1.18: KPJ Healthcare Bhd has announced that its wholly-owned subsidiary Lablink (M) Sdn Bhd had entered into a subscription and share purchase agreement (SSPA) with Quadria Capital (via subsidiary KL Kappa Sdn Bhd) for the sale of existing Lablink shares as well as a share sale that will collectively result in Quadria Capital owning a 49% stake in Lablink’s enlarged share base with the remaining 51% stake held by KPJ. Quadria Capital would subscribe to new Lablink shares and purchase existing Lablink shares from KPJ for a total cash consideration of RM119.9 million. This proposal is expected to be completed by the first quarter of financial year 2018 (1QFY18).

Quadria Capital has invested about US$1.5 billion (RM5.88 billion) in 18 healthcare companies across the Asia-Pacific (India, Bangladesh, Vietnam, Singapore and the Phillipines) with about 45% invested in healthcare delivery (hospitals and other forms of clinical care) and 30% apportioned to life sciences (pharmaceutical manufacturing companies) and the remainder apportioned to healthcare services relating to support delivery and treatment of healthcare.

As at 3QFY17, KPJ had a cash balance of RM318.2 million and a net gearing ratio of 0.76 times. Assuming that the proceeds from the SSPA will be utilised to offset against borrowings, our implied pro forma net gearing will decrease to 0.69 times from 0.76 times.

The rationale for this disposal is in line with the group’s expansion plans for its pathology and diagnostics business. This partnership will allow KPJ to expand its reach into new growth markets in the Southeast Asian region with a seasoned partner, while simultaneously shifting the capital expenditure burden at the holding level. As such, we view this disposal in a positive light.

Unchanged, this disposal is not expected to have any material impact on the group’s core earnings in the near term. We like KPJ as it offers investors exposure to a pure Malaysian hospital play. Its niche lies in its regional hospital network that feeds patients to its urban specialist centres. — Hong Leong Investment Bank Research, Jan 24