KPJ announced that it had entered a sales and purchase agreement (SPA)
with Danaharta Hartanah SB (DHSB) to acquire Menara 238, a 36-storey
office building currently housing the Group headquarters, for a total
consideration of RM206m. Of this, 20% would be paid via internal funds
while the remaining RM164.8m will be funded through debt. We estimate
that FY14 net gearing will be raised from 0.3x to 0.45x with the
additional debt.
Purchase price of RM206m seems reasonable. Menara 238 is located on Jalan Tun Razak, near the IJN hospital. The building has a total net lettable area (NLA) of 490,000 sq ft, of which the Group currently occupies 15%. According to the valuation by property consultant CH Williams, the market value of Menara 238 is RM220m. However, the property is encumbered by a private caveat lodged by its former owner.
Rationale. The Group believes its purchase consideration to be “reasonable and affordable” as it plans to move all its non-revenue generating services in KPJ hospitals to the building in order to maximize hospital space for capacity expansion. This would utilize 30% of Menara 238‟s NLA, or 146,000 sq ft. The Group plans to lease out the remaining space and enhance its rental income. It may also inject the building into Al-Aqar REIT in future for capital gains.
Maintain Neutral with unchanged TP of RM6.20. While the purchase will reduce rental expenses and improve operating margins, the Group‟s gearing and interest expenses will correspondingly be increased. Future injection into the Al-Aqar REIT would likely yield capital gains considering the low purchase price, but the Group would then resume paying rental on its offices. All said, we are neutral on the acquisition of Menara 238, deeming it a tradeoff between the Group‟s P&L and balance sheet in the long run. Maintain Neutral on KPJ with unchanged TP of RM6.20 based on 30x FY14 P/E.
Source: PublicInvest Research - 18 Oct 2013
Purchase price of RM206m seems reasonable. Menara 238 is located on Jalan Tun Razak, near the IJN hospital. The building has a total net lettable area (NLA) of 490,000 sq ft, of which the Group currently occupies 15%. According to the valuation by property consultant CH Williams, the market value of Menara 238 is RM220m. However, the property is encumbered by a private caveat lodged by its former owner.
Rationale. The Group believes its purchase consideration to be “reasonable and affordable” as it plans to move all its non-revenue generating services in KPJ hospitals to the building in order to maximize hospital space for capacity expansion. This would utilize 30% of Menara 238‟s NLA, or 146,000 sq ft. The Group plans to lease out the remaining space and enhance its rental income. It may also inject the building into Al-Aqar REIT in future for capital gains.
Maintain Neutral with unchanged TP of RM6.20. While the purchase will reduce rental expenses and improve operating margins, the Group‟s gearing and interest expenses will correspondingly be increased. Future injection into the Al-Aqar REIT would likely yield capital gains considering the low purchase price, but the Group would then resume paying rental on its offices. All said, we are neutral on the acquisition of Menara 238, deeming it a tradeoff between the Group‟s P&L and balance sheet in the long run. Maintain Neutral on KPJ with unchanged TP of RM6.20 based on 30x FY14 P/E.
Source: PublicInvest Research - 18 Oct 2013
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