Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BDMS) 

 

With ~40% of revenue from provincial hospitals - aimed at middle income clients - BDMS is feeling the pinch of the slow economy, which has put revenue growth into low gear. This requires us to lower our forecast by 10% for 2015 and 11% for 2016. However, this still reflects 17% earnings growth in 2016, beating SCBS universe estimate of 15% and we thus see any share price correction as giving long-term investors a chance to accumulate. We maintain BUY with a new DCF TP of Bt23/share (down from Bt24/share). 

 

Provincial hospitals slowing. A conversation with BDMS reveals that revenue growth continues slow at existing hospitals at 5% YoY in 2Q15, fairly stable from 4% YoY in 1Q15. Softening organic growth comes largely from slower operations at provincial hospitals (~40% of revenue) where revenue grew only 3% YoY versus the 6% YoY growth at hospitals in Bangkok (~60% of revenue). Clientele of these hospitals are primarily middle income and more sensitive to the economy, leading them to put off going to the hospital if it is not serious. BDMS reports a fall of 1% YoY in revenue per patient at provincial hospitals compared to growth of 5% YoY for hospitals in Bangkok. Including revenue from 13 newly-opened hospitals (less than one year in operation), hospital revenue grew 11% YoY in 2Q15, missing our forecast of 15% YoY. 

 

Earnings cut by 10% in 2015 and 11% in 2016. Our assumption changes: 1) a cut in revenues of 5% in 2015 and 6% in 2016 to factor in weaker revenue growth than anticipated and 2) a reduction in EBITDA margin to 22.1% in 2015 (down from 23.1%) and 22.8% in 2016 (down from 23.9%). After the earnings revision, BDMS is forecast to deliver earnings growth of 13% in 2015 and 17% in 2016. 

 

2Q15 preview: Net profit at Bt1.6bn. We expect BDMS net profit in 2Q15 at Bt1.6bn, up 7% YoY but down 30% QoQ in backs of; 1) revenue from hospital operations at Bt14bn, up 11% YoY but down 6% QoQ on seasonality, thanks to 11% YoY total patient volume growth and flat revenue per patient and 2) EBITDA margin at 20.3%, down from 20.7% in 2Q14 and 24.7% in 1Q15. The fall YoY in EBITDA margin arises out of slow operations at newly-opened hospitals as eight of the 13 still report negative EBITDA. Therefore, the expected earnings growth in 2Q15 of 7% YoY indicates that existing hospitals are strong enough to more than offset losses from new hospitals.  

 

Short-term pressure but see as opportunity to buy for the long term. In the near term, we expect a share price correction on concerns of slow growth at provincial hospitals and earnings downgrades. However, we see this is an opportunity for long-term investors to accumulate the stock, as 2Q15 will be this year’s lowest, with better earnings in 2H15 and 2016 earnings growth of 17% YoY – above the 15% estimated for SCBS universe. BDM earnings growth outlook is resilient, underwritten by its large hospital network and a steady growth in demand. We maintain our BUY rating on BDMS with new TP of Bt23/share (down from Bt24/share) consisting of Bt21/share for BDMS (DCF valuation with WACC at 8.8%) and Bt2/share for its investment in listed hospitals (BH and RAM).