Bumrungrad Hospital

Bumrungrad Hospital Plc (BH) 

 

Review of master plan 

We reiterate our Outperform rating on BH with a TP of Bt270. We are positive on the four investment plans that BH outlined at an analyst meeting yesterday and believe that these projects will benefit the company in the mid to long terms. BH shares have declined 20% from their peak in September (vs. no change in the SET Index). We see this as a good time to accumulate the stock, given its attractive valuation of just 33x PER in 2016E, lower than the 35x average of its regional peers, despite BH’s higher EPS growth and higher ROE.  

Investment highlights 

- Master plan update. Management provided an update of its master plan yesterday, announcing that it had two new projects in the pipeline: 1) a plan to renovate its existing hospital building (Soi Nana) in order to increase capacity; and 2) a plan to open a diagnostic clinic in Myanmar to refer patients to its hospital in Bangkok. As for the other two previously announced projects, management said construction of the Sukumvit Soi 1 facility should start by mid-2016 and be finished by the end of 2017. For the new hospital planned for Petchaburi Rd, the target completion date might be pushed back another year to 2020 if the capacity expansion at the main building is deemed adequate to meet demand. 

- Total capex. Total capex for the four projects is Bt12bn during 2016-20: 1) Bt2bn for the expanded capacity of the existing hospital; 2) Bt100mn for the clinic in Myanmar; 3) Bt2bn for the Sukumvit Soi 1 project; and 4) Bt8bn for the new Petchaburi Rd hospital. All four projects will be financed by internal cash flow. BH has cash on hand of Bt7bn and can generate cash of Bt3bn a year, so there will be no need for a capital increase. 

- We are positive on BH’s investment plans. We understand that BH is trying to give priority to improving efficiency at its existing hospital facility and the Sukumvit Soi 1 extension before opening a new hospital on Petchburi Road to maintain the group’s high EBITDA margin in the medium term. We agree with this move as the investment cost of the new greenfield hospital on Petchburi Road is high (Bt8bn). The early opening of a second hospital before patient demand is sufficient would hurt BH’s earnings in the medium term.  

- High EBITDA margin to remain for the next 3-4 years. We expect that the delay in the Petchburi Rd project while fully utilizing the existing hospital will help BH maintain its EBITDA margin at a high level of 31-32% in the next 3-4 years before the Petchburi Rd facility opens in 2020.  

- Earnings revision. To reflect the new master plan, we revise up earnings by 4% in 2018-19 to reflect the positive upside from the renovation of the existing hospital. For 2020-2021, we revise down earnings by 5% to reflect the delayed opening of the new Petchburi Rd campus from 2019 to 2020. This results in 8-year earnings CAGR increasing to 19% from 18% during 2015-22E.  

Valuation 

- We maintain our TP at Bt270, based on a DCF valuation in 2016E. We like BH for its strong 3-year earnings growth, highest EBITDA margin & ROE in the sector and for the laggard status of its stock. The stock is now trading at a PER of 33x in 2016E, below the 35x average of its regional peers. We believe BH deserves to trade at a premium valuation as it offers EPS growth of 26% in 2016E (higher than the average of 21% for regional peers) and an EBITDA margin of 32% in 2016E (higher than the 23% average of regional peers) and an ROE of 31% (higher than the 16% average of regional peers). Maintain Outperform rating.