Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)

Investment thesis
BGH’s share price has fallen following a consensus earnings forecast downgrade (based on management revenue guidance and diminished expectations for margin, due to expenses tied to aggressive expansion in FY13-14). However, expansion will deliver major long-term earnings growth, particularly in FY15. Thus, we reiterate our BUY rating with a lower YE13 target price of Bt170 (down from Bt182). Given BGH’s high FY13 core PER of 36x, we think a good entry price would be about Bt140 (a PER of about 31x, the global Healthcare mean).
Weak 2Q13 numbers expected
We estimate a core profit of Bt1.2bn for 2Q13, down by 7% YoY and 38% QoQ, and a net profit of Bt1.3bn, down by 2% YoY and 38% QoQ. Note that we previously expected a core profit of Bt1.4bn; we now assume a 2% higher SG&A/sales ratio. We model for 10% YoY growth in healthcare revenue, led by patient volume (flat pricing). The SG&A/sales ratio will post a 2% YoY rise to 22% for 2Q13, as the firm is building internal support systems for new hospitals to launch in 4Q13 onward. We expect 3Q13 core profit to drop 7% YoY but jump 56% QoQ (high season); 4Q13 profit is forecast to rise 10% YoY but drop 16% QoQ.
Earnings projection cuts
We have revised down our core profit forecasts by 10% for FY13 and by 17% for FY14, due to lower assumptions for revenue (down by 4% for FY13 and 6% for FY14) and core margin (down by 0.8% for FY13 and 1.7% for FY14). Our FY13 healthcare revenue growth projection falls from 17% to 12% (BGH now guides for income growth of 12-13%; it earlier guided for 15%). We now assume YoY core margin contractions of 0.5% for FY13 and 0.2% down for FY14.
Margin squeeze, due to accelerated expansion in FY13-14 
The CFO now guides for core margin squeeze of 0.5-1.0% during FY13-14, as the firm needs to prepare human resources for new hospitals (mostly slated to open in FY14). BGH will have 50 hospitals in FY15, up from 29 at YE12, and 7,000 IPD beds (up 32% from 5,308 at YE12).The board has approved 10 new hospitals so far this year. BGH guides that the board will approve a further five new hospitals in 2H13 and another five by mid FY14 (some may be acquisitions rather than newbuilds).
Three-year revenue CAGR target range of 16-19%
CEO reaffirmed a Bt70-75bn top-line target for FY15 (Bt44bn in FY12). Margins will be squeezed through FY15 by the high cost of opening new hospitals. However, core margin will still be in double digits (we assume a 13.5% mean for FY13-15 versus 13.9% in FY12). Non-healthcare businesses (proprietary medical production) could possibly mitigate margin squeeze.