Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH) 

Maintains 2014 target, implying stronger 2H14. BGH is leaving unchanged its 2014 targets of revenue growth of 13% YoY (vs. +11% YoY in 1H14) and EBITDA margin of 22-23% (vs. 22.8% in 1H14). This suggests better operations in 2H14. BGH reported fewer international patients in July, during Ramadan, reducing revenue in that month. However, momentum has been strong in August with revenue growing in the double digits, backed by more patients – both Thai and international after Ramadan – and the improving economy and better political prospects.

New hospitals delayed from 3Q14. Still targets 50 hospitals. BGH is operating 34 hospitals and plans to open nine more in 2H14-2016. It has modified its plan and now three of the four hospitals originally scheduled to open in 3Q14 will now open in 4Q14 because of the regulatory processes that must be completed. BGH maintains its goal of owning 50 hospitals in 2015, implying seven hospitals yet to be announced. 

Expect CB to complete this year. Shareholders approved the issue of a convertible bond (CB) not exceeding Bt10bn. BGH is now working on the details of coupon rate, final conversion price and conversion ratio and expects to complete the offering this year. It says that if it does not see an attractive investment opportunity, it will use the funds to repay debt. Even with the bond issuance BGH is financially healthy with net debt to equity at 0.7x (up from 0.5x), well below debt covenant of 1.75x.

3Q14F to be a record high. A short-term catalyst for BGH will be the expected record high for core earnings in 3Q14. Backing the high will be QoQ seasonally higher revenue and wider EBITDA margin. It will also not be booking the costs from the hospital openings that have been put off to 4Q14. In 4Q14, core earnings will slip QoQ on seasonality and the impact of opening the new hospitals. It will still report YoY core earnings growth in 4Q14 thanks to cost controls that are widening EBITDA margin.

Raise earnings; 2015-16 now above consensus. Factoring in the good EBITDA margin in 1H14 brought by the cost control program and including earnings from the Sanamchan Hospital Group (acquisition completed in August), we raise BGH’s core profit by 2% in 2014, 4% in 2015 and 5% in 2016. We forecast EBITDA margin at 22.5% in 2014 (up from 21.9%), 22.8% in 2015 (up from 22.1%) and 23.1% in 2015 (up from 22.6%). Our new earnings projection suggests strong core earnings at 22% CAGR over the next two years. We are 7% above consensus for 2015F and 5% for 2016F. 

PEG discounted to regional peers. Maintain BUY with new TP at Bt22/share. BGH’s share price has outperformed the market by 30% YTD. Despite the surge in share price, in our view, valuation is still attractive against the regional average, with 2015 PEG at 1.4x compared to a regional average of 2.0x. BGH is our top pick in the healthcare sector. We maintain BUY with new TP at Bt22/share (up from Bt19/share).