Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)

Maintain BUY. We maintain our BUY call on BGH with 2013 TP at Bt180/share. BGH’s long-term outlook is promising with a large and strong hospital network covering healthcare demand in all segments, high to low. Aggressive expansion with a goal of 50 hospitals in 2015 (from 30 currently) and better asset utilization made possible by its large scale offer upside to earnings. Short-term catalyst is outstanding 1Q13F core earnings compared to peers. BGH’s valuation is attractive compared to regional peers as it is trading at 1.3x PEG vs. 1.5x for regional peers.
1Q13F preview: Record core earnings. We expect it to report record core earnings at Bt1.8bn, up 22% YoY and 25% QoQ. Net profit will drop 46% YoY since last year it recorded a Bt1.8bn non-cash item from gain on fair value adjustment of its investment in BH. Strong core earnings are backed by:
1) Revenue of Bt12bn, up 13% YoY and 3% QoQ. Main driver is volume growth at 10% YoY while revenue intensity growth is small at 2% YoY. The small growth in revenue intensity is likely due to a higher proportion of revenues from upcountry hospitals where average billing per patient is relatively lower than in Bangkok. 1Q13F revenue growth at 13% YoY falls short of its own target of 15% this year because of the low revenue intensity.
2) EBITDA margin at 25.7%, down from 25.9% in 1Q12 but higher than 23.3% in 4Q12. The slightly lower EBITDA margin YoY is due to lower revenue intensity with some impact from higher staff expense, mainly from hospitals in the provinces, after the rise in the nationwide minimum daily wage this year.
3) Lower corporate tax rate to 20% from 23%.
Q2 2013F outlook. BGH reports that in the first two weeks of April, revenues grew 11% YoY. Though 2Q13 earnings are likely to soften QoQ on seasonality, it plans to boost revenue intensity by launching healthcare packages and promotions and better coordinate its specialty care network within the group (heart, cancer and spine centers). BGH will book non-cash items of gain on fair value adjustment of the investment in KDH (holding raised to 44.96% from 20.01%) and Medic Pharma (holding lifted to 84% from 49%).
Expansion in supportive business to strengthen the group. BGH plans to increase its holding in Medic Pharma, a non-listed pharmaceutical company, from 49% to 84% at a cost of Bt150mn. Although Medic Pharma’s earnings at Bt57mn in 2012 are small compared to BGH, Medic Pharma provides medical supplies at a better price than outside sourcing would. Currently 20% of its revenues are from BGH and BGH expects this to increase in the future. Medic Pharma is a healthy company with net profit margin at 12% and low liability to equity at 0.3x in 2012.