Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)

In line with our model
BGH announced a core profit of Bt1.2bn for 2Q13, down by 5% YoY and 38% QoQ. The core result was in line with our estimate, but 8% below the consensus, which had expected fatter margins.  Net profit was Bt1.1bn, down by 14% YoY and 49% QoQ. Note that BGH booked two non-cash items—marked-to-market gains on its investments in Thonburi Medical Center Plc (Bt61m) and The Medi Phama Co Ltd (Bt70m).
Results highlights
The weak profit was due to core margin squeeze of 1.8% YoY and 5.7% QoQ to 10.5%. Slimmer core margin outweighed the effect of 11% YoY growth in healthcare revenue to Bt11bn. Healthcare income comprised 73% Thai patients (up 10% YoY) and 27% foreigners (up 11% YoY). In 2Q13, patient volume rose by 8% YoY for IPD and by 5% for OPD; pricing growth of 3% for IPD and 4% for OPD. Healthcare GM dipped from 32.2% in 2Q12 to 31.5%, due to higher wage costs. The SG&A/sales ratio jumped 2.7% YoY to 22.7% in 2Q13. Profit-sharing from associates surged 23% YoY to Bt253m, led by Bt138m in equity income from BH and Bt107m iin profit-sharing from RAM.
The QoQ earnings contraction was mainly due to low season. BGH’s utilization rate fell from 73% in 1Q13 to 66% in 2Q13. Net gearing rose slightly rose from 0.4x at end-March to 0.5x at end-June.
Outlook
We anticipate a YoY core profit decline for 3Q13, due to margin slippage—high SG&A expenses tied to BGH’s aggressive expansion program. However, 3Q13 earnings will jump QoQ on seasonality. The 4Q13 profit will fall both YoY and QoQ.  
What’s changed?
1H13 core earnings account for 48% of our full-year forecast (47% of the street model), which we maintain unchanged. There is scope for profit upside over the long-term. Firstly, BGH will consolidate Ratanavej Hospital Co Ltd in Nov (158 IPD beds). Secondly, new acquisitions—the firm intends to add four more hospitals to its portfolio by mid 2014.
Recommendation
We believe a good entry price would be Bt140, which would be roughly equal to the global mean healthcare PER. BGH looks unattractive in the short-term— YoY earnings slippage is expected through 2H13—but we like the firm for its expansion plan and long-term growth profile (a forecast FY13-15 revenue CAGR of 16%). The announcement of a new acquisition would boost the stock price. Our BUY rating stands with a YE13 target price of Bt170, a 5% discount to DCF value.