Bangkok Dusit Medical Service

Bangkok Dusit Medical Service Plc (BGH)
 

Investment thesis: BGH group CEO and president, Dr Prasert Prasarttong-Osoth, addressed the analyst meeting yesterday. He reinforced our confidence in the achievability of the firm’s aggressive expansion plan for the next three years. BGH deserves to trade at a PER of at least 30x (its current FY12 PER is 26.3x), given its scope for earnings upside from new acquisitions and investments. Our TRADING BUY stands with a YE12 target price of Bt100.
Expansion through M&As: The president unveiled his long-term strategy. Further acquisitions would boost growth over the next 3-5 years. The key criteria for acquisitions are scope for synergy-building and an IRR hurdle rate of 15%. He said he wants to buy or build three hospitals per year. BGH has set a comfortable D/E ceiling of 1x. We estimate that the strong balance sheet (a 0.4x net gearing ratio at end-March) could support a 34% capacity expansion through acquisition (assuming a cost of Bt8m/bed).
To enter big provinces: Within the next two years, BGH will increase its exposure upcountry—particularly in the North and the Northeast. The provincial expansion will enable specialist referrals to BGH’s hospitals in Bangkok. The firm recently started building a greenfield hospital in Chiangmai (the first phase of 55 beds will open in 2014; a capacity of 200 beds is planned) in order to enter the Northern Region market.
No hostile takeover policy for BH: Dr Prasert claimed that the increased investment in BH was purely to enable BGH to recognize equity-sharing on its income statement (the equity method requires a minimum 20% stake). He said the 16% dilution risk (137m new shares) from the possible exercising of convertible debentures (CDs) prompted his firm to buy an extra 3% stake in BH last Friday for Bt68 apiece (it now holds 23.3%). Assuming that all the CDs are converted, we calculate that BGH needs to buy only another 0.6m shares in order for its post-dilution holding to exceed 20%.
We have revised up our FY12-13 profit forecasts by 1% (new EPSs of Bt3.39 for FY12 and Bt4.07 for FY13). We have factored a further 3%% profit-sharing from BH into our long-term projections. The purchase price implies a PER of 24.6x (discounts to BGH’s 26.3x and the regional healthcare mean of 29.4x).