Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH) 

Investment thesis
BGH’s FY15 revenue target is Bt70bn (a 16% CAGR for FY13-15). It may be achieved earlier—if the firm continues buying up hospitals at the current swift rate. Under the best-case scenario, FY15 revenue would be Bt90bn (an FY13-15 CAGR of 26%). A re-rating is deserved to 2.5SDs above BGH’s FY06-12 mean PER to 40.6x (last peak) on anticipation of new hospitals. We maintain our BUY rating with a YE13 target price of Bt192, a 5% discount (previously10%) to DCF value. We model for a strong core profit CAGR of 21% for FY13-15 with scope for upside.
Projection upgrades
Our earnings forecasts rise by 1% for FY13, 6% for FY14 and 9% for FY15 to factor in four new hospitals—Royal Phnom Penh Hospital (to open in 4Q13), Bangkok Hospital Phuket (in 1Q14), Bangkok Hospital Chiangmai (mid FY14) and Soonthornphu Hospital (FY14).  We also included BGH’s recent 45% stake in Krungdhon Hospital Plc (KDH) (tender offer, Feb 11-March 18 and rebranding to Samitivej Thonburi Hospital). Thus, the firm has added 670 beds (13%) to IPD capacity to a total of 6,021. Our healthcare revenue forecasts are ahead of the consensus by 2% for FY13 and by 5% for FY14.
Potential for further upward revisions
There is scope for upside to earnings forecasts (both ours and the street) from new acquisitions. We estimate that a further three deals might be sealed this year—Khonkaen (Northeastern Thailand), Pitsanulok (North) and a new hospital in central Thailand—about 100 IPD beds per facility. Also, the higher stake in KDH as a result of the tender offer will add to profit. If BGH were to financially consolidate KDH (from equity income), the marked-to-market gain (non-cash) would boost its bottom-line.
Top-line expansion
The firm targets 15% revenue growth in FY13 (we model for 17%). By FY15, it wants its top-line to hit Bt70bn, led by portfolio expansion. The number of hospitals will jump from 30 currently to 50 in FY15; IPD capacity will rise to more than 6,500 beds. New acquisitions will expand in terms of both segmentation and geography. BGH will enter new provinces in Thailand, Laos and Myanmar. Its balance sheet will support the aggressive expansion plans (net gearing was 0.4x at YE12).
Core margin sustainability target
BGH plans to maintain core margin of at least 13.9% (the FY12 number) in FY13-15. Fixed costs at new hospitals will remain high in the early stages of operations. We assume a slightly increase in core margin of 0.3% YoY for FY13. Economies-of-scale (ongoing revenue expansion through FY15) and non-healthcare units (proprietary medical production) could make for a margin that exceeds BGH’s target.