Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)
 

In line with our estimate: BGH reported a record core profit of Bt1.4m for 1Q12, growth of 61% YoY and 71% QoQ.  The core result was in line with our estimate, but 9% below the consensus (the street probably over-estimated healthcare revenue). Net profit also posted a new record of Bt1.9bn, due to a Bt1.8bn marked-to-market gain on BGH’s 20.3% stake in BH. Note that BGH switched from the cost method to the equity method to book its BH holding—its stake rose from 14% at YE11 to 20% at end-March. Thus, BGH reversed a Bt1.4bn marked-to-market gain on BH that it had entered on its income statement in 4Q11.
Results highlights: The impressive core profit was driven by all-time high healthcare revenue of Bt10.7bn, led by 16% YoY organic growth at BGH and the consolidation of the Phyathai-Paolo hospital group (consolidated in 2Q11). Both volume and pricing contributed to the higher YoY revenue—volume growth of 7% for IPD and 4% for OPD; price increases of 11% for OPD and 7% for IPD. GM declined from 41.2% in 1Q11 to 35.5% in 1Q12, due to lower GM for Phyathai-Paolo group. But core margin expanded by 0.8% YoY and 4.4% QoQ because Phyathai-Paolo hospitals are more efficient, on average, than BGH hospitals. The net gearing ratio was low at 0.39x at end-March.
Outlook: BGH will post strong YoY profit growth for 2Q12 (but a seasonal QoQ decline), driven by organic expansion and profit-sharing from BH (cost method in 2Q11 versus equity income in 2Q12). We anticipate a record net profit for 3Q12.
What’s changed? 1Q12 earnings represent 28% of our FY12 model (and 26% of the consensus), which we maintain unchanged in the absence of a new acquisition. But BGH is clearly prepared for a new purchase—the board has approved expanding paid-up capital by 77.3m shares (a 5% increase).
Recommendation: A new acquisition would act as a share price catalyst. BGH trades at an FY12 PER of 26.7x (1SD above its FY05-11 mean of 30.3x).  Our TRADING BUY rating stands with a YE12 target price of Bt100, a 20% discount to DCF value (WACC of 10% and a 2% terminal growth rate).