Bumrungrad Hospital

Bumrungrad Hospital Plc (BH)
Realising that there is not much synergy in its relationship with Bangkok Chain Hospital (KH), BH has sold its entire 25% stake in the hospital. It seems that BH will now have to start its expansion from scratch, which will take time. We raise our forecasts to reflect lower interest cost and lift our target P/E basis from 22x CY13 to 27x (1 SD above the historical average to 2 SD above) due to the hype. However, we downgrade our call from Outperform to Trading Sell as the share price has run up. It is not an outright Neutral as we still like its business model
What Happened
BH yesterday sold its entire 25%
stake (499m shares) in Bangkok
Chain Hospital (KH) to both local and
foreign institutions at THB9.15/share.
It received THB4,566m from the sale.
BH invested in the stake in March last
year for THB3,563m or THB7.1 a
share.
What We Think
We expect BH to make about THB1bn
in capital gains or THB772m
(THB0.89/share) on an after-tax
basis and believe this one-off gain will
be booked in 3Q12.
We were not surprised by the sale as
we did not think that the cooperation
between BH and KH would have
lasted due to their conflicting
long-term strategies.
This move by BH also shows that its
management does not have a clear
long-term vision, compared with
BGH. Future expansion prospects
look bleak.
Additionally, we believe BGH is
unlikely to buy more BH shares as the
share price has surged on sector M&A
hype.
What You Should Do
Given the stronger-than-expected
M&A hype in the sector, we revise up
our target price from THB63, based
on 22x CY13 P/E (1 SD above the
historical average) to THB77.50,
based on 27x CY13 P/E, 2 SD above.
However, given that BH’s share price
has surged 75% YTD vs. the market’s
17% gain, we believe its valuation of
28.5x CY13 P/E and 18.4x CY13
EV/EBITDA is too rich. We therefore
downgrade our call from Outperform
to Trading Sell. We believe that its
valuation is way above its peers and
could trigger further selling pressure.
Handsome gains but …
BH yesterday sold its entire 25% stake (499m shares) in Bangkok Chain
Hospital (KH) to both local and foreign institutions at THB9.15/share. It
received THB4,566m from the sale. BH invested in the stake in March last year
for THB3,563m or THB7.1/share. We expect BH to make about THB1bn in
capital gains or THB772m (THB0.89/share) on an after-tax basis and believe
this one-off gain will be booked in 3Q12.
We expect BH to use most of the sale proceeds to pay off debt raised to finance
the investment. As such, interest costs will fall and so we raise our earnings
forecasts by 3-7% for CY12-14.
… no synergy or lacking vision
We were not surprised by the sale as we did not think that the cooperation
between BH and KH would have lasted to begin with. The whole saga began
when BH, witnessing the growth of BGH’s domestic hospital portfolio over the
past decade while its own overseas ventures yielded little fruit, panicked and
hastily chose a partner that it thought would allow it to catch up with BGH. We
believe that BH bought a stake in KH just to prevent BGH from acquiring it.
We did not think that the relationship would have worked because BH wants to
move into the mid-end market, where KH is a market leader at the moment,
while KH wants to move to the high-end, which is BH's stronghold.
The first sign of trouble surfaced soon after BH bought its stake. KH declined
BH an equity stake and did not allow it to manage its new high-end World
Medical Centre, which is a 300-bed hospital scheduled to open in October this
year. As they have conflicting goals, it is no surprise that BH divested its entire
stake. This also suggests that BGH’s strategy is superior to BH's.
Expect decent 3Q12 results
We believe that BH will report strong quarterly results in 2Q12 on the back of
higher patient volume, higher prices and increased illness intensity. We also
believe its gross margin was stable at almost 42% with its SG&A still under
control.
As a result, we expect BH to report THB501m net profit (THB0.58/share) in
2Q12, up 46% yoy but down 14% due to seasonality.
Valuation and recommendation
With the M&A theme still driving the Thai healthcare sector, we revise up our
target price from one SD above the historical average to two. As such, our target
price is lifted from THB63, based on 22x CY13 P/E, to THB77.50, based on 27x
CY13 P/E.
However, although we still like its defensive business model, its share price has
done extremely well recently and the stock is now trading at 27.8x CY13 P/E and
16.4x CY13 EV/EBITDA, which we believe is stretched. Hence, we downgrade
our call from Outperform to Trading Sell. It is not an outright Neutral as we still
like its business model.