Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH) 

Beat our model: BGH reported a core profit of Bt1.3bn for 2Q12, up 43% YoY (but down 10% QoQ on seasonality). The core result was 8% above our estimate and 5% ahead of the street, due to lower-than-expected SG&A expenses.
Results highlights: The solid YoY core profit growth was driven by 16% healthcare revenue expansion to Bt10.4bn and an SG&A/sales drop from 26.6% in 2Q11 to 20.0%. Both volume (OPD up 5%, IPD up 7%) and pricing (OPD up 10%. IPD up 8%) increased in YoY terms. Foreign patient income jumped 23% YoY, receipts from Thai patients by 13%. Equity income increased by 121% YoY and 172% QoQ to Bt206m in 2Q12—Bt120m from BH and Bt82m from Ramkhamhaeng Hospital. Core margin fattened from 10.1% in 2Q11 to 12.4% in 2Q12—better-than management guidance of a 1% YoY increase.
The net gearing ratio rose from 0.39x at end-March to 0.48x at end-June—still healthy, in our view.
Outlook: BGH will post record high core earnings for 3Q12 of Bt1.5-1.6bn, up more than 20% both YoY and QoQ.  Profit-sharing from its 24% stake in BH will triple QoQ in 3Q12 (the firm switch recognition of its holding in BH from the cost method to equity income in March 2012). Note that BGH’s healthcare revenue rose 15% YoY in July. 
What’s changed? 1H12 core earnings represent 51% of our FY12 model (47% of the consensus). BGH is clearly prepared for a new purchase—the board has approved expanding paid-up capital by 77.3m shares (a 5% increase). We will adjust our forecast on news of an acquisition.
Recommendation: We prefer BGH (a good entry price would be below Bt100). Our YE13 target price is Bt126 (a 20% discount to DCF value (WACC of 10% and a 2% terminal growth rate). The stock trades at an FY12 PER of 23.9x, near its FY06-11 average. A new acquisition would act as a share price catalyst. BGH aims to expand capacity IPD capacity by 20% through new acquisitions over the next three years.