KPJ Healthcare Bhd

Hey everyone,

Today I attended a media hi-tea at Hilton Hotel Kuala Lumpur which was organized by one of the private healthcare operator in Malaysia that is listed on Bursa Malaysia, KPJ Healthcare Bhd.

The event is basically organized to appreciate the media for their continuous support through coverage as well as updating their operation and strategy for the years to come.

If you do not know, the acronym KPJ stands for "Kumpulan Perubatan Johor" or loosely translated at "Johor Medical Group".

As at 8:00 pm, Monday, April 21, 2014, Blooomberg data showed that the main shareholders of KPJ Healthcare are:-

• Johor Corporation Bhd - 45.28%
• Employees Provident Fund - 13.03%
• Lembaga Tabung Haji - 10.38%

Among senior management officers present were (the names below are not meant to be exhaustive and complete):

1. Tn. Hj. Amiruddin Satar (Mr), president and group managing director
2. Datin S. Fauziah Jamaluddin (Ms), senior general manager - group talent management
3. Mohd Johari Ismail (Mr), senior general manager - group business operation
4. Norhaizam Mohammad (Ms), senior general manager - group finance
5. Rafeah Ariffin (Ms), senior general manager - group marketing and corporate communications
6. and many, many more - I just did not had the chance to exchange business cards

Update by the President and Managing Director

The following are some of the salient points collected during the opening speech by KPJ Healthcare president and managing director:-

• KPJ Healthcare is embarking on expansion plan to open more hospitals in Malaysia. The recently opened a hospital in Rawang, and will be opening more in Pahang, Perlis, Melaka and Miri. As for the exact date, I do not want to speculate on when -- let's leave it to Mr Amiruddin to announce it soon.
• KPJ Healthcare is also taking part in the development of Iskandar Malaysia (specifically in Bandar Dato' Onn) and they are planning to open its flagship specialist hospital there in the next two years.
• Some of KPJ Healthcare's hospitals have reached their maximum capacity (i.e. not enough beds to serve their customers), and for this case they are embarking on an expansion plan especially at its KPJ Ampang Puteri Specialist Hospital and KPJ Seremban Specialist Hospital. The cost for expansion (which include upgrading work is estimated around RM50 million to RM100 million, according to Mr Amiruddin).
• As for the goods and services tax (GST) to be introduced next year, KPJ Healthcare said that it will be impacted. According to Mr Amiruddin, based on earlier announcement, the impacted item will be medical supplies (drugs, medicines etc.) which he said will be taxed 6% under the GST regime. However, detail and conclusive story on this is not finalized.
• Year-on-year, there will be an increase in cost which Mr Amiruddin expect to increase between 3% to 5%. The cost increase, he said, are due to (i) partly on GST impact, (ii) labour cost and (iii) material costs.
• On his company's outlook, Mr Amiruddin expects the company to have a year-on-year 10% growth on profit margin against revenue.
• Mr Amiruddin also touched on manpower issue -- currently, he said that the country is facing surplus of nurses, citing about 7,000 to 8,000 nurses unable to get a job. This is an issue that the industry need to address, and with KPJ Healthcare's expansion plan, it should be able to create more jobs in the long run.
• On question regarding 14% hike in doctor's fee, he said that this is timely as for more than past 10 years, doctors in Malaysia have not had their so-called 'increase' in their fees.
• Mr Amiruddin also said that KPJ Healthcare is actively working with the government to tackle dengue and cyclical disease outbreak by providing affordable healthcare to Malaysians at-large.
• He also touched on medical tourism and said that data from Malaysian Healthcare Travel Council showed that the country continue to receive influx of tourists for this purpose.
• As part of its transformation program, Mr Amiruddin added that it is embarking on cloud-based information system with IBM Malaysia to provide seamless healthcare services to more than KPJ Healthcare's 2.5 million patients.
• KPJ Healthcare chief information officer Dr Mubbashir Iftikhar said that the company is currently investing RM17 million (initial investment) on cloud-based hardware infrastructure. Currently, three of its hospitals' IT system is on cloud system. By end-2015, he targets all of KPJ Healthcare's network hospital to be on cloud-system.
• IBM Malaysia Paul Moung, who is also present yesterday added that KPJ Healthcare is the first hospital in Malaysia and possibly one of the first few in the Asean region to invest on cloud-system platform to manage medical records and hospital data.

KPJ Healthcare Financial Highlights

Year	Revenue (RM billion)	Profit Before Tax and Zakat (RM million)	Net Profit [profit after tax and minority interest, PATAMI] (RM million)
2013	2.33*	151.1*	102.5*
2012	2.10	196.9	140.0
2011	1.91	204.6	143.7
2010	1.65	168.0	118.9
2009	1.46	145.3	110.9

Source: company annual reports

*unaudited, but announced to Bursa Malaysia

KPJ Healthcare Network of Hospital Statistics

Year	Number of Hospitals
2012	22
2011	20
2010	20
2009	19
2008	19

Source: KPJ Healthcare Annual Report 2012

List of KPJ Healthcare Network of Hospitals

Country	Region	Hospital
Malaysia	Central	KPJ Ampang Puteri Specialist Hospital KPJ Damansara Specialist Hospital KPJ Selangor Specialist Hospital KPJ Tawakkal Specialist Hospital KPJ Kajang Specialist Hospital Sentosa Medical Centre KPJ Klang Specialist Hospital
	Northern	KPJ Ipoh Specialist Hospital KPJ Penang Specialist Hospital Taiping Medical Centre Kedah Medical Centre Sri Manjung Specialist Centre
	East Coast	KPJ Perdana Specialist Hospital Kuantan Specialist Hospital
	Southern	KPJ Johor Specialist Hospital KPJ Puteri Specialist Hospital KPJ Seremban Specialist Hospital Kluang Utama Specialist         Hospital KPJ Pasir Gudang Specialist Hospital
	East Malaysia	Kuching Specialist Hospital Damai Specialist Hospital KPJ Sabah Specialist Hospital Sibu Specialist Medical Centre
Indonesia	Jakarta Region	RS Medika Permata Hijau RS Medika Bumi Serpong Damai
Australia	Queensland	Jeta Gardens (Brisbane)
Bangladesh	-	Sheikh Fazilatunnessa Mujib Memorial KPJ Specialist Hospital*

Source: KPJ Healthcare Annual Report 2012

*On Nov 19, 2013, KPJ Healthcare announced to Bursa Malaysia that it has entered into an agreement to manage a hospital in Bangladesh. 

KPJ Healthcare also has a 23.37% stakes in Vejthani Hospital.

Historical Share Price

As at 5:00 pm today [Monday, April 21, 2014], data from Bursa Malaysia showed that KPJ Healthcare's share closed at RM3.25 per share. Analysts have mixed reaction on this stock, and the 'strongest' call so-far (my personal opinion, of course) was by Alliance Research on April 15, 2014 where they gave the rating "sell" with a revised target price of RM2.84.

The reason cited by the Alliance Research analyst Tan Kee Hong was:-

Accordingly, we expect KPJ’s near-term earnings growth to remain tepid as start-up losses are likely to continue to be a drag on its earnings. With earnings momentum likely to remain negative going forward, we maintain our SELL recommendation with a revised TP [target price] of RM2.84, based on 15x EV/EBITDA.

The analyst also said that currently, the following hospitals within KPJ Healthcare group are loss-making:-

1. KPJ Klang Specialist
2. KPJ Pasir Gudang
3. KPJ Rawang Specialist
4. RSM Bumi Serpong Damai

Also, earlier on March 17, 2014, Kenanga Research also gave a somewhat similar rating of "underperform" on KPJ Healthcare. The reason given, if I can summarize:-

We came back from a visit to KPJ Healthcare (KPJ) feeling less sanguine about its prospects for the next few quarters due to start-up losses from the opening of new hospitals and higher operating costs.

The target price given by Kenanga Research on March 17, 2014 was RM2.67.

Let's look at the chart shown below to appreciate the stock price:-

[screenshot taken from Yahoo! Finance on April 21, 2014 at 10:00 pm]

Tracing from the chart over the past one year, we see that the stock peaked at RM4.90 on July 25, 2013. And notice also that the stock peaked between the month of July to mid-August.

At today's hi-tea with KPJ Healthcare, the president and managing director Mr Amiruddin is very optimistic with the company's outlook. He said, and I quote him below:-

Overall, I have confidence on our economy moving forward.

This is quite a strong statement, and I foresee that he has a strong faith in the economy and performance of his company, going forward.

His view was concurred by the research report by Standard Chartered Equity Research analyst Stephen Hui dated March 14, 2014, where earlier, he gave an outperform rating on this stock (with target price of RM3.62), stating that:

We like KPJ's strong market position as Malaysia's largest private hospital operator and its defensive business model.

Of course, you have to read the entire research report to appreciate the matter more, but what I am saying is that there are two sides of the coin, and it is you who must choose which side you want to lean on to. 

There is no right or wrong and it is a matter of your own judgement when buying stock, people.

And each analysts have their own way of looking and analyzing a particular stock.

Below are the summary of research house's recommendation on this stock:

Consensus target price: RM2.65 

Research House	Date Recommended	Target Price	Rating
Standard Chartered Equity Research	April 17, 2014	RM3.62	Outperform
Alliance Research	April 15, 2014	RM2.84	Sell

Source: Bloomberg Data as at 9:00 pm, Monday, April 21, 2014

And below is consolidated rating by analysts covering this stock:-

Rating	Number of Analysts	Percentage
Buy	4	23.5%
Hold	5	29.4%
Sell	8	47.1%

Source: Bloomberg Data as at 9:00 pm, Monday, April 21, 2014

Alternative Perspective on KPJ Healthcare Financials

On another perspective on this topic, one of the senior management (I shall not name the person here) of KPJ Healthcare told me not to look at "net profit" as this could be "misleading". The person told me that of course net profit is important to shareholders because they want to know how the group performed as a whole.

The person also told me that since KPJ Healthcare is managing 25 local hospitals in Malaysia, some of the hospitals are bound to make loss. The reason for this is because the gestation period for the new hospital [to reach break-even] is normally from three to five years.

The view by the person was nonetheless concurred by CIMB Research analyst Saw Xiao Jun (together with Ivy Ng Lee Fang) in their March 12, 2014 report, where they gave a "reduce" rating with target price of RM3.12:

However, its new hospitals will incur large start-up losses and may take up to five years to break even. The losses could offset stable earnings and growth in its more established hospitals until 2016. Continued losses overseas may exacerbate its near-term earnings woes.

And in another paragraph, they added that:

We would turn more positive on KPJ if its new hospitals turn profitable earlier than expected.

And the person told me that save for the loss-making hospitals, overall, KPJ Healthcare is generally doing good as there are only four hospitals so far that are loss-making, which dragged the group's financial highlights down. The person told me that you need to wait three to five years in order for that hospital to be profitable.

Of course, the net profit that we journalists talk about is the profits after tax and minority interests [PATAMI] which is later used to calculate earnings per share [EPS]. But for the company, the person added that you need to look at the profits before tax and zakat as this will give clearer view of the company's financial highlights.

KPJ Healthcare Expansion Plan

Some of the projects in the pipeline include:

#	Project	Total Capacity	Estimated Completion
1	Muar, Johor	120	2QFY14
2	Rawang, Selangor	159	2QFY14
3	Tg Lumpur, Pahang	160	2015
4	Perlis	90	2015
5	Bandar Dato’ Onn, Johor	390	2015
6	K/Bayuemas, Selangor	200	2016
7	Miri, Sarawak	120	2016
Total		1,239	-

Source: CIMB Research, March 12, 2014

Whether or not you want to buy or sell the stock, you should do your own research and exercise your own judgment.

This posting is not a recommendation to buy, hold or sell stock related to the company mentioned here.

This posting is my own reflection and analysis of what transpired at today's event.