Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BDMS)

 

Investment thesis

BMDS it a catch-up play as its FY16 PER is now the lowest of multiples among our Healthcare coverage—37.8x for BDMS against 39.0x for BH and 41.0x for CHG. Margin recovery in FY16 is a strong catalyst for the share price. Our BUY rating stands, at a YE16 DCF-derived target price of Bt24/share based on a 7.7% WACC and 2.0% terminal growth rate. 

Good statistics in 4Q15 led to no low seasonal earnings 

Despite Oct-Dec low seasonality, BMDS will post record-high healthcare revenue of Bt16bn in 4Q15 (up 10% YoY and 3% QoQ), leading to our core earnings forecast of Bt1.9bn, or gains of 14% YoY and 3% QoQ. Revenue expansion YoY is driven by 12% growth in income from foreign patients and 9% from Thais. Volume growth is impressive at 10% YoY for Thai OPD and 17% for Thai IPD; foreign volume will rise 9% YoY (OPD) and 9% (IPD) in 4Q15 despite no low-base benefit from foreign demand in 4Q14. Volume expansion outweighs flattish pricing (billing per head). Core margin is expected to slightly increase YoY and flat QoQ for 4Q15.

High hopes for margin recovery in 2016

The core margin has shown it will improve from its nadir at 10.6% in 2Q15 to 12.2% in 3Q15 and sustain QoQ in 4Q15 (outperforming the historical pattern of QoQ slippage). FY16 efficiency is in focus and our conservative model suggests a 30bps fatter core margin, which would be a scope of margin upside. There is only one greenfield hospital to open this year in Jan, Paolo Rangsit, which so far entails high OPD volume of 200 patients per day. Thus, there is no longer margin pressure from the new hospital in the full year. Most importantly, two greenfield hospitals (opened in FY13), Samitivej Thonburi and Bangkok Udon (5% of total IPD capacity), will turnaround from net losses in FY15 to profit in FY16.  

Conservative FY16 business plan 

BDMS guides for FY16 revenue growth of 9-10%. EBITDA margin is expected to be slightly higher YoY. We modeled for FY core profit growth of 16%, outperforming the SET, and BLS coverage (flat YoY). CAPEX will dip from 11-12% of total revenue for the past few years to 10% in FY16. Thus, the end of the capital spending cycle will encourage returns. 

Five land bank parcels on hand to support future expansion 

The company is in no rush to achieve 50 hospitals in its portfolio—a timeline extended to FY18 at the earliest to control efficiency—from the present 43 operating. It has secured five land plots in Pattaya, Chiang Rai, Khao Yai, Surat Thani and Krabi on which to develop greenfield hospitals but said the soonest launch would be in 2018. Acquisitions will highlight that operating assets can suddenly add value accretion. A clean balance sheet will support new acquisitions, at a low net gearing ratio of 0.5x at YE15 (far below the 1.75x of its net debt-to-equity covenant).