KPJ, a good value stock

Background

KPJ Healthcare Bhd ('KPJ') is the largest private healthcare provider in Malaysia. It has 18 hospitals in Malaysia as well as 6 hospitals overseas (3 in Indonesia, 2 in Saudi Arabia & 1 in Bangladesh). In addition, KPJ also owns 2 nursing colleges- one in Nilai & the other in Nusajaya. The nursing colleges, known as Puteri Nursing College may represent the 2nd core business for KPJ.

Historical Financial Performance

From FY2002 to FY2007, KPJ's pre-tax profit has increased from RM14.9 million to RM74.2 million, while turnover increased from RM416 million to RM1,733 million.



Recent Financial Performance

KPJ's results for 4Q2008 reflects the impact of the current economic slowdown. Its turnover dropped marginally when compared to the 3Q2008, while pre-tax profit & net profit declined by 21% & 28% for the same periods. The drop in the pre-tax profit was due mainly to allowance for impairment of an associate company of RM6.5 million. If this impairment provision is excluded, KPJ's profitability remained unchanged.



If we compared the last 4 quarters ith the preceding 4 quarters, we can see that KPJ's net profit has increased by 5.7% from RM74 million to RM78 million, while turnover increased by 15% from RM1.11 billion to RM1.27 billion. EPS increased from 36 sen to 38 sen.

Valuation

KPJ (closed at RM2.80 at the end of the morning session today) is now trading at a trailing PE of 7.4 times. For a company with a CAGR of about 38%- based on its track record from FY2002 to FY2007- KPJ is trading at an undemanding PEG ratio of only 0.2 times! For more on PEG ratio, go here.

Technical Outlook

From the weekly chart, we can see that KPJ is in a long-term uptrend, with support at RM1.70-80. In the medium-term term, KPJ is trending lower in a downward channel where the support & resistance are presently at RM2.20 & RM3.50, respectively.


Chart: KPJ's weekly chart as at Feb 25, 2009 (source: Quickcharts)

Conclusion

Based on the inelastic demand for healthcare & the attractive valuation, KPJ is a good stock for long-term investment. While the ideal entry is at RM1.70-80, I believe that one should aim for the more attainable RM2.20 level.