Bangkok Dusit Med Service

Bangkok Dusit Med Service Plc (BGH)
 
BGH has guided for a strong 2Q12, just as we are expecting, but results could beat consensus. The Street may thus upgrade its forecasts even before its results are out, potentially catalysing its share price in the near term. With its strong earnings outlook, BGH remains our top pick in the sector. We believe the sector’s re-rating will continue on the back of defensive earnings, strong growth and more M&A opportunities. Maintain forecasts, OUTPERFORM and target price, at 27x CY13 P/E (1sd above its historical average). 
 
What Happened
In an analysts’ meeting, BGH had guided for a strong 2Q12, which could lead to earning upgrades even before its results are out on 15 Aug. Its hospital revenue had grown 16% yoy, powered by a 6% increase in volume, 5% increase in prices and higher illness intensity. Foreign patient revenue grew 23% yoy while Thai patient revenue rose 13% yoy.

What We Think
We expect 2Q earnings to grow 45% yoy to THB1.3bn. If our forecast materialises, its core net profit in 1H12 would form 48% of our FY12 forecast. As our number is 10% above consensus, we believe the Street will upgrade its forecasts, potentially catalysing BGH’s share price in the near term.

What You Should Do
Stay invested. We believe valuations at 21x CY13 P/E and 15x CY13 EV/EBITDA are not stretched, given a 28% EPS CAGR forecast for the next three years. With their strong earnings outlook and defensive earnings, we believe healthcare stocks will continue to be re-rated. Potentially more M&As are additional catalysts.

Strong guidance from management

BGH has guided that revenue grew about 16% yoy in 2Q12 with Thai patient revenue up 13% and international patient revenue up 23%. Higher volume, higher prices and higher illness intensity all played their parts. Specifically, outpatient volume grew 5% yoy to 19,341 visits/day, while average
daily census rose 7% to 2,646 patient beds. Revenue per outpatient visit grew 10% yoy to THB2,799 while revenue per patient day grew 8% to THB27,160. EBITDA margins dipped yoy, but net margins before share of profits from Bumrungrad Hospital (BH) and Ramkamhaeng Hospital (RAM) was higher by 120bp, led by lower interest expense and income tax.

Decent 2Q12

We expect a THB1.3bn core net profit, up 45% yoy but down 8% qoq due to seasonality. Strong topline growth, higher margins and lower interest expense should have been behind the yoy growth. However, as BGH booked a THB479m revaluation gain from its acquisition of the Phyathai Group in 2Q11 and a THB1.8bn revaluation gain from its acquisition of more Bumrungrad shares in 1Q12, its bottomline is likely to be lower yoy and qoq. We do not expect major non-recurring items in 2Q12.

Three new hospitals planned

BGH recently bought a 120-bed hospital in Udon Thani, Northeast Thailand, for THB500m; it will be spending another THB350m on capex. It is renovating the hospital now and plans to open it in Dec 12. BGH is also building a new 200-bed hospital in Chiang Mai, scheduled for opening in 2014 (55 beds in its first phase). This new hospital will focus on mid-to-high-end treatment. In 2010, BGH bought a 140-bed distress hospital in Rayong, about 200km east of Bangkok, from the Legal Execution Department. This is scheduled for opening in 2013 with 30-40 beds during its initial phase. Investment cost is about THB290m. The total investment cost for these new hospitals is about THB2bn, which can be easily financed internally as BGH is expected to generate THB8bn-9bn of cash flow from operations annually. However, contributions from these three

should be small in the next few years, against BGH’s large earnings base from 29 hospitals.
Re-rating to continue Although BGH has rallied 22% YTD to outperform the SET’s +16%, we believe its current valuations of 21x CY13 P/E and 15x CY13 EV/EBITDA are not stretched, given a 28% EPS CAGR forecast for the next three years. With their strong earnings outlook and defensive earnings, we believe healthcare stocks will continue to be re-rated, especially with the recent listing of a large regional peer. BGH is likely to grow faster than its local peers through
higher illness intensity at its low-to-mid-end hospitals, while continuing to add hospitals.
Potentially more M&As in the sector can provide additional catalysts, in our view. Reiterate OUTPERFORM.