Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)

- Acquire Sanamchan Hospital to reach patients in western Thailand
At the analyst meeting yesterday, BGH announced 2014 strategy which focused
on enhancing service efficiency and controlling cost and expenses regarding
personnel, medical equipment, inventory, and bad debt, in order to increase
EBITDA margin from 21.3% last year to 22-23%. The company has targeted
revenue growth of 13%, 10% from existing hospitals and 3% from new
hospitals. At present, BGH has 31 hospitals in its network and has planned to
open other five hospitals in 3Q14, one in 4Q14, two in 2015, and another one
in 2016, mounting the total number of hospitals under its operation to 40. In
addition, BGH has acquired Sanamchan Hospital in Nakhon Pathom with the
investment cost of B3,555-3,655m; the deal will be complete by July 2014 and
earnings of the new hospital will be included in consolidated financial statement
of BGH since August 2014 onward. After the acquisition, BGH will have three
more hospitals in its network, which are 1) a 176-bed Sanamchan Hospital in
Nakhon Pathom, which will change to Bangkok Sanamchan Hospital, 2) a 60-
bed Tepakorn Hospital, in which Sanamchan Hospital holds 44.5% stake, and
3) Muang Petch Hospital in Petchaburi, in which Sanamchan Hospital owns the
land and buildings. Moreover, Sanamchan Hospital also holds 25% stake in
Muang Ratch Hospital in Ratchaburi.
- No benefit from acquisition this year
Under BGH's acquisition and management, BGH would improve Sanamchan's
company image and raise its patient volume. Also, BGH would make
Sanamchan a healthcare hub in the western region of Thailand, covering
Nakhon Pathom, Ratchaburi, Phetchburi, Kanchanaburi and Suphanburi;
expanding BGH's profit base in the long run. Sanamchan's FY2014 net profit is
expected at B150m; Sanamchan's earnings in the last five months of the year
(estimated B70m) would be booked by BGH. As 100% of the acquisition fund is
from loan, BGH would need to book B60m interest expense. Overall, BGH's
acquisition of Sanamchan is expected to breakeven this year (financial advisory
cost included). We maintain our FY2014 earnings forecast, projecting BGH's
normalized profit to grow by 11.3%yoy in 2014 and 13% in 2015.
- Other seven hospital deals waiting. Buy on weakness
The share price has already risen to reflect the business recovery and benefit
from the acquisition deal until the current fair value (DCF) of B17.5 can provide
only 6.7% upside. However, with other seven hospitals standing in line and its
plan to buy more hospitals, mostly big upcountry hospitals in the within two
years, there is substantial room for a future increase in fair value. We reiterate
to buy on weakness.