Bangkok Dusit Medical Services

Bangkok Dusit Medical Services (BGH)

Investment thesis: We have downgraded our rating from BUY to HOLD, due to a stretched valuation. BGH is a great company, but its share price has doubled since merging with Phyathai-Paolo Hospital group last year to hit our YE12 target price of Bt80. The FY12 PER is now 26.5x, a premium to the FY06-11 mean of 22.4x (and far above the global Healthcare average of 20.5x). In the absence of further big acquisitions, BGH’s earnings growth profile for 2Q-4Q12 is relatively subdued and the FY12 ROE outlook is flat. Within Healthcare space, BH currently looks more attractive, due to its lower multiples.
The Phyathai-Paolo effect will end in 1Q12: The consolidation of the Phyathai-Paolo Hospital group in April 2011 brought on a YoY surge in earnings. But 1Q12 will be the last quarter in which BGH will surf the post-consolidation bottom-line swell. Core earnings growth will decelerate from 50% YoY in 1Q12 to around 20% for April-Dec 2012 (still good in comparison with the SET, but it’s difficult to justify a further PER re-rating at that profit growth rate).  
The street is too bullish: The consensus forecast is too optimistic, we believe (a core profit of Bt5bn versus our model of Bt4.8bn). The street’s FY12 projections exceed BGH’s guidance—revenue growth of 16% (BGH guides for 11%) and net margin of 12.2% (BGH guides for 11.0%). Figures offered by management indicate FY12 core earnings of 15% below the consensus forecast (and 10% short of our projection).
Scope for further inorganic growth limited: The merger with Phyathai-Paolo Hospital group (IPD capacity jumped 36%) was a coup for BGH. But while the firm will almost certainly make further acquisitions, the size of any new assets will be much smaller. Eight SET-listed hospital firms could potentially be takeover targets—NEW, KDH, M-CHAI, SKR, AHC, CMR, VIBHA and NTV. But even assuming 100% takeovers, no single deal among the eight would boost BGH’s bottom-line by 10%. The firm would probably be best to build its stake in RAM from its current 38%—a full takeover would increase BGH’s bottom-line by 15%. However, that may take time (it took from 2005 through to 2008 to accrue the 38% holding).
Outlook
The Phyathai-Paolo effect will end in 1Q12: The consolidation of the Phyathai-Paolo Hospital group in April 2011 brought on a YoY surge in earnings (core profit growth of 187% YoY for 2Q11 and 74% for 3Q11). But 1Q12 will be the last quarter in which BGH will surf the post-consolidation bottom-line swell. Core earnings growth will decelerate from 50% YoY in 1Q12 to around 20% for April-Dec 2012 (Figure 1; still good in comparison with the SET, but it’s difficult to justify a higher PER at that profit growth rate). BGH’s FY12 PER is 16% above its FY06-11 mean and its YE12 PBV is a hefty 4x (a level last hit in 2007), 2SDs above its average.
Unrealized gain from BH stake will boost the 4Q11 bottom-line: 4Q11 Healthcare profit will outperform the market—the flooding meant more sick people. We expect BGH to post YoY core earnings growth for the quarter (versus a 20% contraction for the broad SET), but a QoQ decline because of seasonality. Furthermore, BH’s share price rally will make for a Bt806m marked-to-market gain on BGH’s 14% stake in that firm (no stake in 4Q10; a Bt224m gain for 3Q11). Thus, we anticipate a YoY jump in its 4Q11 bottom-line.