Bangkok Dusit Medical Services

Investment thesis

We have upgraded BDMS’ rating to BUY (from HOLD), at a YE16 DCF-derived target price of Bt22 (8.9% WACC and 2.0% terminal growth rate). It is a good entry price after a sharp price correction (down 14% from its peak of the year) that has mostly priced in earnings risk (we see a 6% earnings risk by the street). Its valuation repeats its last entry level at 1SD above its FY06-14 mean—and the share price trades at an FY16 PER of 33x. Margins have seen a nadir in 2Q15 and recovery is forecast in 1Q16. 

Last earnings forecast cut of the year 

We have cut our core earnings forecast 5% for FY15-16 to reflect a lower core margin assumption by 0.6% for FY15 and 0.7% for FY16 to 12.5%. The core margin cut is to fine-tune a 0.6% margin contraction YoY in 1H15. We conservatively assume that the margin has yet to recover in 2H15 (YoY down by 0.8%, in our model) due to losses from operation of new greenfield hospitals, which are in the early stages of their commercial runs (Figure 2). New greenfield hospitals pull down BDMS’ utilization rate mean from 70% in 1H14 to 63% in 1H15—gradually higher in 2H15. 

Margin pain is almost finished 

The core margin of 12.0% in 1H15 and the deep low of 10.6% in 2Q15 is a repeat of BDMS’ last trough during the period of aggressive expansion in FY13—human resource expenses ahead of hospital increases from 31 in FY13 to 40 in FY14 (Figures 5&6). In FY15, weak margins are due to the seven greenfield hospitals that opened during 1Q14-2Q15. Thus, the margin pressure will ease in 1Q16 after no more such hospitals are launched in 1H16 and the utilization of the new hospitals is gradually ramped-up. BDMS intends to mitigate margin downside risk by expanding non-hospital business, which has a 2-5% fatter margin than hospitals. The non-hospital revenue target is Bt3bn in FY17 (Bt1.2bn in 1H15).  

Good 3Q15 result forecast

Healthcare revenue posted strong growth of 14% YoY in July-August (11% in 1H15) due to Thai patient recovery (double-digit growth YoY versus a 6% growth in 1H15). Thus, we expect core profit growth of 3% YoY and 32% QoQ in 3Q15. Besides, there is scope for upside from gains of the Muangraj acquisition in 3Q15. Earnings for 4Q15 should resume to 10% YoY growth followed by a flattish YoY in 2Q15-3Q15. 

Firm reaffirms 50-hospital target 

BDMS has 44 hospitals in its portfolio (42 operating facilities and two under construction). Management reaffirms its 50-hospital target, but extends the timeline to YE18 from YE16 to control efficiency. Acquisitions should focus the operating assets to suddenly add value accretion. A clean balance sheet will support new acquisitions, at a low net gearing ratio of 0.6x at end-June (1.75x of net debt-to-equity covenant).