Chularat Hospital

Chularat Hospital Plc (CHG) 

 

Investment thesis

We maintain our BUY rating on CHG at an upgraded YE16 DCF-derived target price to Bt3.30/share (from Bt2.80) to reflect our earnings upgrade, at WACC of 8.4% and a terminal growth rate of 2.0%. We prefer CHG for its superior earnings growth of 26% for FY16-18. It deserves a rerating on its earnings growth outperformance but there is a cheaper FY16 PEG of 1.8x for CHG versus the PEG of 2.5x for the global healthcare mean. With its promising earnings growth outlook, its FY16-17 PER mean is 41x, far below its latest peak at 44x. A short-term catalyst is its proven 1Q16 record profit. Our model suggests attractive capital gain on an implied YE17 share price of Bt3.60/share. 

Value accretion at Chularat Rayong prompts earnings upgrade

We have revised up core profit forecast by 1% for FY16, 2% for FY17 and 3% for FY18 to include earnings accretion from its acquisition in 1Q16. We take a positive view on the 1 Mar 2016 purchase of Ruampat Rayong Hospital (Ruampat, now “Chularat Rayong”) due to its cheap acquisition price, good operating assets and scope for earnings upside from improved margin. The deal suddenly adds 13% IPD capacity to CHG (from 392 beds at YE15 to 442 beds) and 10% more Social Security Office SSO registered members (from 345,775 at YE15 to 380,775). 

To post quarterly record core profit in 1Q16 and 3Q16 

CHG will prove that it can run at a high utilization rate although the first batch of new capacity at CHG 3 kicked-off in 1Q16. The average utilization rate is expected to stay high at above 90% in 1Q16 for IPD and 70% for OPD. Thus, we anticipate quarterly record core profit of Bt160m for 1Q16, a jump of 20% YoY and 12% QoQ. Quarterly earnings are likely to hit a record high again in 3Q16, boosted by high seasonality and new capacity at CHG 9 and its 304 International facility. 

Winning FY16 sector core earnings growth, outperforming SET

CHG is the core earnings growth winner of our Healthcare stocks for FY16, outperforming BLS coverage SET stocks—core profit growth of 26% for CHG versus 16% for the sector and flattish for the SET. Of our Healthcare coverage, only CHG has inorganic growth from capacity expansion for FY16 (brownfield and acquisition)—154 new IPD beds or 39% growth to 546 beds by YE16 (55 IPD beds from CHG 3, 50 from CHG Rayong 39 from CHG 9 and 10 from 304 International). 

Scope for earnings upside on new acquisitions 

CHG’s financial status is brilliant on its net-cash position during FY10-15 and it appears set to have sustained its net-cash position at YE16—with a low debt-to-equity-ratio forecast of 0.3x. Its strong balance sheet will support new opportunities for investment and acquisitions to sustain its earnings growth profile over the long term. New acquisition will entail scope for an earnings upside to our model and that of the consensus.