Bangkok Dusit Medical

Bangkok Dusit Medical Plc (BGH)

Event
- We upgrade BGH to Outperform from Neutral and raise our TP to Bt18 from Bt15.
This reflects earnings additions from the Sanamchan acquisition and better cash
inflow from potential M&A deals.
Impact
- Acquisition of Sanamchan Hospital Group
BGH announced the acquisition of Sanamchan Hospital (SNC), which operates
three hospitals (555 beds) in the western region of Thailand. The acquisition cost is
Bt3.5bn-Bt3.7bn and we expect the transaction to be completed by July 2014.
 We are positive on this deal given the reasonable acquisition cost of Bt7m/bed,
or 18-19x PER and 2x PBV in 2014E. Moreover, adding footprint in an untapped area
for BGH could increase its patient base.
 We expect this acquisition could add Bt150m earnings, or 2% of 2014E BGH
net profit.
- Next: focus on M&As. Management said that target to reach 50 hospitals by 2015-
16 should be on track. After this acquisition, BGH will have 43 hospitals. The next
seven hospitals could be in the form of M&A rather than greenfield. We are positive
on this idea as the faster cash cycle of brownfield could help BGH balance earnings
growth and EBITDA margins. Note that BGH’s earnings recently suffered from loss
contribution from the initial start-up of a greenfield project. Earnings contribution
from acquisitions could help lift BGH’s overall EBITDA margin.
- Revised EBITDA margin. We revised our EBITDA margin estimates in 2015-18 by
50-90bps to reflect better earnings contribution from M&A projects. Our new EBITDA
margin is ~21% in 2014-16E and increases to 22-23% in 2017-18E, see Fig 3.
Earnings and target price revision
- We increase our EPS by 3-8% in 2014-18E to reflect the earnings contribution from
the SNC acquisition, lower interest cost from interest rate swaps and earnings
additions from potential M&A projects. We raise our TP to Bt18.00 from Bt15.00.
Price catalyst
- 12-month price target: Bt18.00 based on a DCF methodology.
- Catalyst: EBITDA margin improvement and M&A deal.
Action and recommendation
- BGH is trading at high PER of 31x in 2015E vs. a five-year CAGR of 23% in 2014-
16E. However, the stock is generating a ROIC of 10% above WACC of 9.1% in
2014E. We expect ROIC will increase significantly to 12-17% in 2016-18E, see Fig 4.
We rate BGH as Outperform with a new TP of Bt18.00.