Saturday, September 25, 2010

Company watch KPJ Health

While staying on the sideline, I will need to continue to find investment ideas. I'm having 50% cash now.

KPJ recently announced that it will acquire a 51% stake in Jeta Gardens for a cash consideration of RM 19 million. Jeta Gardens is an owner of an aged care facility with 108 beds, 23 units of retirement villas and 32 units of apartment located on 64 acres of land in Queensland, Australia. Jeta Gardens reported a net loss of AUD 2 million for FY ending 2010. I'm not really disturbed by this latest development as turnaround is part of their DNA.

The stock has already undergone corrections, this news invited more selling pressures.

Despite of the stock price moved up by leaps and bounds, this stock is still not very popular among retail investors. If you try to google KPJ on blogsphere, you cannot find any people(except one) talking about it. Only MalaysiaFinance talked about this stock about 8-9 months ago. He put up a very solid case for investment.

He has done the heavy lifting job, be sure you read his thesis. Here is the link:

I just want to piggy back a bit more on the reasons why I like this stock. Short answer: operating in a defensive sector, good growth potential and good management that delivering results consistently.

In terms of growth, KPJ is at par if not better than Raffles or Parkway. KPJ's lower margin is understandable because they have not been able to move up to perform some of the higher value added procedures yet.

I believe they will catch up in a couple of years from now. They have demonstrated improvement. Revenue per patient in 2005 was $515 and 2009 was $667. Profit after tax per patient was $25 and moved up tremendously to $51, slightly more than double.

Despite of the past impressive growth and they still can continue to grow due to larger market size compared to Singapore, KPJ is still not getting that kind of premium it deserves. Most of other regional hospital operators are selling for 25 times PE.

The business growth is quite predictable as they are trying to open up more hospitals, 1 - 2 per year. 2 - 3 years from today, they will serve about 2.7 million patients or generating 137 million(2.7 million x 51) after tax profit or per share earning of 0.24. Assuming no change in the PE multiple, 18X will give us a fair value of $ 4.26.

I think we did lose out a bit on the perception that Singapore and Thailand did far better as medical tourism destinations. That causes KPJ suffers a bit of discount. Hopefully, ETP will fix that.

Since we don't have the privilege to some of M & A information to make big money like Gordon Gekko, the only way to make some money is to wait for it to be out-of-favor. It will be hard for this stock to be sold $ 1 for 0.5 after Fortis-Khazah episode( Let's wait for the opportunity.

Disclosure: No position yet.

No comments: