Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)

Investment thesis
Yes, we believe so—the current price is a good entry point, particularly for long-term investors, as BGH’s FY14 PER is now consistent with the global Healthcare mean. A YoY core margin recovery should manifest in 2Q14, prompting stock price growth. Earnings will rise strongly in FY15 onward, supported by economies-of-scale from 50 hospitals. Our BUY rating stands with a YE14 target price of Bt169, a 5% discount to DCF value (9.6% WACC and a 2% terminal growth rate).
Resilient revenue growth amid economic slowdown
BGH stands as testament to healthcare demand being largely immune to the state of the economy. Despite the 3Q13 GDP slowdown, the firm delivered record healthcare revenue of Bt13bn, up 12% YoY (7% price rise tied to intensity cases and 5% volume growth). The growth will continue through 4Q13 (YoY and QoQ), driven by the acquisition of a hospital in Phitsanulok in Oct 2013. Management guides that healthcare revenue expansion is typically 3x GDP growth. BGH’s revenue disaggregates as 65% Bangkok & vicinity and 35% from the provinces.
Margin has bottomed out, but will take time to rebound
We believe core margin bottomed out at 10.5% in 2Q13 (down 1.8% YoY, due to expenses tied to expansion). Margin inched up QoQ to 11.9% in 3Q13 (down 5.2% YoY). We expect core margin of 10.9% in 4Q13 (1.8% YoY slippage)—down QoQ on year-end expense-booking. Core margin will decline YoY again in 1Q14 from the high base of 16.3% set by 1Q13. The margin squeeze is due to heavy expenses tied to swift expansion in FY13. In 10M13 BGH bought or started building 11 hospitals, which will bring its total from 29 at YE12 to 40 hospitals when all are open—IPD capacity expansion of 26% (details in Figure 1). Most of them are being built from scratch and will open in 1H14 onward.
The necessary doctors and nurses and key facilities have been prepared ahead for all 40 hospitals, so expenses should peak in FY13. Most important, BGH guides for further acquisitions (10 deals to bring the total to 50 hospitals by YE15)—the expenses tied to acquisitions are lower than for greenfield hospitals. Thus, margin squeeze will ease in 2H14.
Healthy balance sheet
Although BGH is expanding aggressively this year, its net gearing ratio was low at 0.45x at end-Sept (a 0.6x mean for BLS’s SET coverage). The acquisition prices are inexpensive. In the most recent deal for the Pitsanulok hospital, which is profitable, the purchase price was Bt3.6m per IPD bed. If a new sizeable acquisition were to present itself, BGH could finance the deal (at least in part) through a share swap in order to keep gearing to a reasonable level.