Bumrungrad Hospital

Bumrungrad Hospital Plc (BH)

Investment thesis: The short-term catalyst is record earnings in 3Q12 (and for FY12). We see scope for bottom-line upside from expansion (potential acquisitions). BH is the most efficient hospital in the region, has the highest ROE of 34.7% for FY12 (including big gains from the divestment of KH) and 26.2% for FY13 versus a 13% global mean. Our conviction BUY rating stands.
Strong healthcare operation: YTD healthcare revenue has expanded 15% YoY, driven by 8% a rise in intensity cases, 4% volume growth and a 3% price increase. Core margin fattened 3.8% YoY with the headline corporate tax cut.
Likely to post record high 3Q12 results: Core profit will be the best of the year and a new record, boosted by high season for patients from the Middle East and rainy season. We expect core earnings growth of about 30% YoY and 20% QoQ. Our 3Q12 net profit forecast is for a new record of Bt1.2bn, up by 150% YoY and 130% QoQ, due to a Bt579m gain (net-of-tax) from divesting KH in July.
BH’s cleanest-ever balance sheet: Thanks to the cash from the KH divestment, gross proceeds of Bt4.6bn (Bt3.6bn net-of-tax), BH will report a net cash position at end-Sept. The surplus funds will support new expansion. Investment in KH provided a pre-tax IRR of 20.5% (BH bought KH from LH in March 2011).
A second hospital: The company acquired land on Petchaburi Road 900 meters from its current hospital on Soi Nana. BH intends to develop a second hospital on the site with 150-200 inpatient beds and a back office. The new hospital will start construction next year; it should be completed in four or five years.
New investment opportunity: BH plans to add a new market segment (second brand) in metro Bangkok. Neither we nor the street has factored in the venture. We conducted a sensitivity analysis in order to gauge the scope for expansion. Based on an IPD bed range of Bt10-20m, we estimate that BH could add another 51-67% of capacity without upsetting its creditors.
Recommendation and valuation
BUY with a YE13 target price of Bt98: BH’s recent share price correction presents an opportunity to BUY (down 12% since peaking in early July). Its multiples are cheaper than its historical numbers and discounted to global means. The stock trades at an FY12 PER of 21.0x; its FY06-11 mean is 21.0x and the global average is 26.7x. BH’s multiples have room to re-rate, as Its PEG is 0.7x, far below the 0.8-1.0x range it traded in during August-December 2011.
We maintain our BUY rating with a YE13 target price of Bt98, pegged to a 20% discount to DCF value (10% WACC and 2% terminal growth). Given a net-cash position at end-Sept, the balance sheet will support new expansion and/or acquisitions, which would mean scope for earnings upside to both our model and the street forecast.