KPJ (5878) - KPJ: 1-to-4 Share Split Goes Begging




Background
KPJ is the largest private hospital group in Malaysia, owing a total of 3000 beds which accounts for 23% of the 13,000 private hospital beds in the country. It’s the fifth-largest hospital operator based on market capitalisation in Asia Pacific behind IHH Healthcare Bhd, Apollo Hospitals Enterprise Ltd, Phoenix Healthcare Group Co Ltd and Fortis Healthcare Ltd.
KPJ currently operates 26 hospitals in Malaysia, two in Indonesia and one in Bangladesh and have more than 1,000 medical specialists on board. KPJ has allocated RM1 billion to add seven new hospitals in the country in the next 5 years. Two of the new hospitals will be built in Sarawak, three in Johor and one each in Perlis and the Klang Valley.

Recent Financial Performance 

For QE30/6/2017, KPJ's net profit dropped 16% q-o-q but rose 6% y-o-y to RM32 million while revenue dropped less than 1% q-o-q but rose 4% y-o-y to RM793 million. The drop in profits was caused by a slight drop in gross profit margin (from 30.2% to 29.9%) and increased administrative expenses (by RM10 million) which had more than offset the drop in net finance cost (by RM3 million) and increased share of results of associates (by RM0.6 million). (Note: KPJ's latest result was announced on August 24.)


Table: KPJ's last 8 quarterly results

KPJ's quarterly revenue has been on a steady uptrend for the past 10 years. Its earning has been flattish in the past 5-6 years due to expansion program which led to lower profit margin as higher administrative expenses were not fully absorbed by revenue from the newly hospitals opened.


Graph: KPJ's last 42 quarterly results

Latest Financial Position

As at 30/6/2017, KPJ's financial position is deemed average, with current ratio at 1.0x and total liabilities to total equity at 1.4x.

Proposed Corporate Exercise

In April, KPJ proposed to carry out a share split of 1-to-4 (here). Such a generous share split has caused many a stock to run amok. While we can see similar euphoria in KPJ-WB (see Chart 3 below), the response from KPJ was muted. The main reason is that steady selling by EPF. Strangely, EPF appears to have ceased its selling since early May (here). It's likely that EPF expects better prices ahead once the share split has been implemented. At that point, KPJ will be priced around the RM1.00 and that would make it an affordable stock for the general public; thus inviting speculative activity and higher prices.

Valuation

KPJ (closed at RM4.16 yesterday) is now trading at a PE of 29.5 times (based on last 4 quarters' EPS of 14.08 sen). At this PER, AEON is over-valued. (Note: IHH is now trading at a PER of about 31 times- based on annualized EPS of 19 sen).

Technical Outlook

KPJ has been moving sideways with a downward bias for the past 3 years. There is no sign that the sideways movement is about to change.


Chart 1: KPJ's monthly chart as at September 5, 2017 (Source: ShareInvestor.com)


Chart 2: KPJ's weekly chart as at September 5, 2017 (Source: ShareInvestor.com)

Chart 3: KPJ-WB's weekly chart as at September 5, 2017 (Source: ShareInvestor.com)

Conclusion

KPJ could be a good speculative stock for a short-term play. While the stock is a good stock for long-term investment, the continuous expansion program is a drag on its earning. This plus the fact that the stock is fully valued make KPJ an unexciting stock, except for one possible short-term play for the 1-to-4 share split.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.


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