KUALA LUMPUR (Dec 14): KPJ Healthcare Bhd’s plan to divest its loss-making Aged Care Business in Australia for A$0.7 million (equivalent to RM2.2 million) is being viewed positively by investment analysts, as the move is expected to cut operating costs and alleviate cash flow requirements for the country’s largest healthcare provider.

RHB Investment Bank Bhd pointed to the earnings-accretive nature of the disposal, which will allow KPJ to refocus on its domestic business. The valuation is seen as compelling at 22 times the 2024 forecast price-to-earnings (P/E) ratio, which is 0.5 standard deviations below the five-year average of 33 times. 

If the transaction is successfully concluded by 2024, RHB estimates a potential 8% earnings accretion based on its 2024 earnings projections, said the research firm in a note. 

“We still like the stock for its key strategic direction down the road, encouraging health tourism growth and gradual improvements in operating efficiency, with its hospitals’ gestation periods likely to start contributing meaningfully to the group by 2024,” said RHB, which maintains its “buy” call and target price (TP) of RM1.66. 

KPJ, through its 57.16%-owned subsidiaries Jeta Gardens (Qld) Pty Ltd and Jeta Gardens Aged Care (Qld) Pty Ltd, signed a conditional sale and purchase agreement with Australian-based DPG Services Pty Ltd on Tuesday (Dec 12) for the proposed disposal of the Aged Care Business for A$700 million. 

Al-`Aqar Healthcare REIT owns the lands and buildings of Jeta Gardens Aged Care facility, while KPJ owns the business and leases the property.

The disposal involves the sale and transfer of selected assets and liabilities related to the business, resulting in an expected gain from the extinguishment of net liabilities amounting to A$6.17 million (approximately RM18.94 million). 

Aged Care business represents the largest revenue contributor to Jeta Gardens Group, representing approximately 94%, 96%, 96% and 97% of total revenue in the financial year ended Dec 31, 2020 (FY2020), FY2021, FY2022, and the nine months ended Sept 30, 2023 (9MFY2023), respectively. 

Jeta Gardens Group has reported annual losses after taxation, ranging from A$4.814 million to A$10.554 million, along with net liabilities ranging from A$20.017 million to A$31.881 million over the past three financial years from FY2020 to FY2022.  

Additionally, for the nine months ended on Sept 30, 2023, the group incurred a loss amounting to A$7.33 million, casting a significant doubt on the group’s ability to continue as a going concern. In this respect, KPJ has been providing financial support to Jeta Gardens Group when necessary, to enable Jeta Gardens Group to meet its liabilities as and when due.

In a separate note, Kenanga Investment Bank Bhd said the exercise is in line with KPJ’s strategy to review its non-core operations and investments, which have posed challenges to earnings in recent years. The divestiture would contribute to a 2% increase in KPJ’s net profit for FY2024, with a corresponding uptick in net assets per share from 51 sen to 52 sen.

“Pending completion of the deal, we maintain our earnings forecasts, TP of RM1.56, and ‘outperform’ call,” it said. 

“We project KPJ’s patient throughput to grow 14% in FY2023 (versus 12% in FY2022), and [a] bed occupancy rate (BOR) of 71% (versus 58% in FY2022), as the demand for private healthcare services resumes its growth path post the pandemic. Additionally, we believe 4QFY2023 could potentially be boosted by a lower effective tax rate,” Kenanga Investment added. 

On the other hand, Public Investment Bank Bhd raised its earnings projection for KPJ by 11%-14% for FY2024-FY2025, after factoring in lower operating costs stemming from the disposal. 

It maintained its “outperform” call and revised its TP higher to RM1.54 (from RM1.45)— based on a multiple of 10 times the enterprise value to earnings taxes, depreciation and amortisation. 

“We believe KPJ’s earnings trajectory would remain intact, buoyed by continuous efforts to identify and optimise underperforming assets and with the group’s ongoing capacity expansions,” said Public Investment.

“We remain optimistic on KPJ’s long-term prospect focusing on medical health tourism, which enables it to charge premium pricing, bolstering revenue intensity and economies of scale to offset inflationary pressures,” the research firm added. 

Shares of KPJ were three sen or 2.14% higher at RM1.43 at the time of writing on Thursday, valuing the group at RM6.47 billion. The counter has risen 43% year-to-date, and 52.13% in the past year.