Bangkok Dusit Medical Services
Size does matter
Bangkok Dusit Medical Services (Plc)
Investment thesis
Dr Prasert Prasarttong-Osoth, CEO, reaffirmed a 3-year target of pushing up BGH’s revenue into the top-five of global healthcare providers and to have the best core margin within the top-five. Its annual revenue growth target is 15% for a top-line in the range of Bt70-90bn by FY15. The portfolio will expand through both greenfield investments and acquisitions, (plans for new hospitals in Cambodia and elsewhere in ASEAN). Our BUY rating stands with an upgraded YE13 target price of Bt132 (from Bt129)—due to greater expectations for earnings—pegged to a 20% discount to DCF value (10% WACC and 2% terminal growth).
We believe BGH deserves a valuation re-rating to at least 1SD above its FY06-11 mean PER (of 21x) to 28x on anticipation of earnings forecast upgrades with the announcement of new hospitals in 1Q13. The stock currently trades at an FY13 PER of 25x.
Earnings upgrades prompted by jump in Oct-Nov revenue
We have increased our core profit forecasts by 1% for FY12 and 2% for FY13 to factor in a better-than-expected performance for Oct-Nov. Revenue jumped by 23% YoY in Oct and 25% in Nov, prompting us to upgrade our FY12 top-line projection by 1% to a record high of Bt44bn. Under our revised model, 4Q12 core profit is expected at Bt1.1bn, up 20% YoY (but down 47% QoQ on seasonality—lower QoQ patient volume and high SG&A expenses in the fourth-quarter). Impressive YoY and QoQ earnings growth will resume in 1Q13.
To announce new three hospitals in 1Q13
We expect BGH to unveil three new hospitals by March 2013 in Khonkaen (Northeastern Thailand), Pitsanulok (North) and Phnom Penh (Cambodia) with initial IPD capacity of about 100 beds per facility. Thus, BGH will add 6% IPD capacity to 5,608 beds in 1Q13, which would mean scope for upside to both our earnings model and the consensus.
Revenue target range of Bt70-90bn for FY15
Dr Prasert guides for strong earnings growth, FY13 through FY15, driven by portfolio expansion. He targets increasing revenue from Bt44bn in FY12 to Bt70-90bn in FY15 (a CAGR of 19-26%), as the number of hospitals is planned to rise from 29 at YE12 to 50 by YE15 (at least five new facilities per year).
Core margin guidance too conservative
Management suggests a core margin of 13.0% for FY12 (up 2.1% from FY11), sustainable through to FY15. The core margin guidance is too conservative, in our view. We assume BGH’s core margin at 13.6% for FY12 and that it will fatten by 50 bps/year in FY13-15, driven by economies-of-scale (ongoing revenue expansion, FY13-15).
