Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)
Investment thesis: The information from the analyst meeting yesterday reaffirmed a strong QTD performance and anticipation of hefty FY12 earnings growth. We prefer BGH (YE12 target price of Bt80—a 20% discount to DCF value). Its FY12 core earnings growth is expected to outperform the market (33% for BGH versus 12% for the broad SET). The strong stock price rally (up 9% in two days to a new high of Bt75) may prompt short-term profit-taking—at an FY12 PER of 23.8x, the stock now trades near its mean. A price correction would present an opportunity to BUY, as further new acquisitions would create earnings upside. BGH’s strong balance sheet (a low net gearing ratio) could support an additional 30% capacity expansion, we estimate. 
Small flooding impact: The flooding affected BGH far less than most sectors (none of its hospitals was inundated). Its organic healthcare revenue rose 10% YoY in Oct (YoY growth of 15% in Thai patient volume and 5% in foreign patient volume) and another 6% in Nov (month-to-date). The strong IPD admission growth more than offsets the effect of slow OPD volume.
Resilient earnings over the next two quarters: BGH will report good YoY core profit growth for 4Q11, outperforming the broad SET, which will post a YoY contraction. We also expect a non-cash gain from BGH marking-to-market its 14% stake in BH (whose share price has jumped 15% QTD). On a QoQ basis, 4Q11 earnings will slow, due to seasonality (record high profit in 3Q11). BGH will resume YoY and QoQ growth in 1Q12 on high season for foreign patient admissions.
Conservative guidance for FY12, but still a good growth profile: Management guided for 11% revenue growth next year and NM of 11.0-11.5% (up slightly YoY). These numbers are more conservative than our model (15% revenue expansion and NM of 12%) or the street forecast (17% revenue growth and NM of 12%). We suspect the subdued guidance could be because BGH anticipates higher expenses related to new investments next year. The firm will upgrade the heart clinics at Phyathai hospitals and initiate a cancer care program at Paolo-Nawamintr Hospital. Over the long term, the investments will make for revenue expansion and higher billing per head (intensity cases).