Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)  
Disappointing core earnings
BGH announced a core profit of Bt1.55bn for 3Q13, down 22% YoY but up 28% QoQ. The core result was 17% below our estimate and 7% short of the consensus, due to higher-than-expected SG&A expenses. 
Results highlights
The YoY profit dive was due to core margin squeeze from 17.1% in 3Q12 to 11.9% in 3Q13. The SG&A/sales ratio jumped from 19.9% in 3Q12 to 23.7% in 3Q13. Profit-sharing from associated companies plunged 57% YoY to Bt240m (a high base was set by 3Q12, due to extra profits recognized by BH and RAM, firms in which BGH holds stakes). The effective tax rate rose 1.7% YoY to 18.1% in 3Q13 (there was a tax shield from losses at upcountry hospitals). Those three items outweighed the effect of 12% YoY healthcare revenue growth to a record of Bt13bn.
Healthcare receipts comprised 75% Thai patients (up 10% YoY) and 25% foreigners (up 12% YoY). In 3Q13, patient volume rose by 4% YoY for OPD and by 2% for IPD; pricing growth was good at 8% for IPD and 6% for OPD. Healthcare GM rose by 0.3% YoY and 3.5% QoQ to 34.9%.
The QoQ earnings expansion was due to seasonality (healthcare revenue growth of 12% QoQ). The utilization rate rose from 66% in 2Q13 to 76% in 3Q13. Net gearing was stable at 0.45x at end-Sept.
Outlook
We anticipate a YoY core profit contraction for 4Q13, due to margin slippage (high SG&A expenses tied to BGH’s aggressive expansion program—nine new hospitals are currently under construction). On a QoQ basis, 4Q13 earnings will drop on seasonality. 1Q14 profit is expected to plunge YoY from the high 1Q13 base of Bt2bn), but rise seasonally QoQ.
What’s changed?
We have cut our earnings model by 7% to Bt6.1bn for FY13 and by 7% to Bt7bn for FY14 to factor in the disappointing 3Q13 results. FY13 core profit comprises 77% of our new forecast, but only 71% of the street projection, which would appear to be at risk of a downgrade.
Recommendation
BGH’s share price is under pressure on anticipation of YoY earnings slippage In 4Q13-1Q14. Margin squeeze will ease in 2H14 when new hospitals start operating. We like BGH for its long-term earnings growth profile, particularly for FY15 onward. Our BUY rating stands with a YE14 target price of Bt169 (down from Bt172, still pegged to a 5% discount to DCF value (9.6% WACC and a 2% terminal growth rate). We believe a good entry price would be at (or below) Bt130, which would imply a PER consistent with the global Healthcare mean.