Bangkok Dusit Hospital

Bangkok Dusit Hospital Plc (BGH) 

Investment thesis

We suggest loading the stock ahead of an expected record core profit for 3Q14 and new acquisitions (expected in 4Q14). BGH trades at an FY15 PER of 33x (1SD above its FY06-13 mean), but has proved a valuation re-rating to 2SDs above its long-term mean during earlier periods of strong earnings growth. We maintain a DCF-derived YE15 target price of Bt20.50 (9.0% WACC, 2% terminal growth).

Foreign patient volume bounced in August-to-date

After political chaos in 1H14 and Ramadan in July, management guides that foreign patient volume bounced in August (particularly from the Middle East). Thus, we anticipate YoY double-digit foreign patient revenue growth in 3Q14, up from 6% YoY growth in 1H14. Thai patient volume remains strong. BGH suggested healthcare revenue rose 11% YoY in the quarter-to-date (YoY growth of 12% in 1Q14 and 9% in 2Q14). 

To post record 3Q14 core earnings

We expect a record high core profit for 3Q14, driven by high season and the consolidation of Sanamchan Hospital Group (starting Aug 15). We preliminarily forecast all-time high healthcare revenue of Bt15bn (up by 15% YoY and 17% QoQ) and core profit growth of 35% YoY and 40% QoQ (against a flattish SET core profit, both YoY and QoQ). Sananchan Hospital Group comprises 2% of our core profit forecast for 3Q14. BGH may realize a marked-to-market gain from its Sanamchan acquisition in 3Q14 (not priced into our bottom-line projection). 

Policy to boost EBITDA margin, despite new hospital openings

Management guides for EBITDA margin growth of 1.7% YoY to 23% for FY14. EBITDA rose only 0.8% YoY in 1H14, so the implication is a fatter HoH margin in 2H14. Six new hospitals start running in 2H14 (Bangkok Hospital Chiangmai on July 11 and five new hospitals in 4Q14, see Figure 10), but the firm intends to expand margin for existing hospitals to achieve its target. BGH also plans to boost margin through fat-margin of non-hospital business. The firm recently paid Bt380m to acquire Save Drug Center Co Ltd (107 pharmacies nationwide). It will be a distribution channel for the firm’s proprietary pharmaceutical manufacturers.   

Bt10bn convertible bonds will enable more acquisitions

By YE14, BGH will issue convertible bonds (CB) to foreign investors—a maximum of Bt10bn, a maturity date of five years. If all the CBs were converted to common shares, the dilution effect would be 3.5%. But the CBs will finance new expansion. BGH intends to buy seven more hospitals (operating assets) by YE15. We estimate that the proceeds would be sufficient to buy about 1,000 IPD beds (13% capacity expansion). Post-CB issuance, the net gearing ratio would be expected to rise 0.1x (net gearing at end-June was low at 0.5x).