Bumrungrad Hospital

Bumrungrad Hospital Plc (BH)

Investment thesis

We have upgraded our rating from HOLD to BUY with a new YE15 DCF-derived target price of Bt146 (up from Bt133) to factor in a fatter long-term GM assumption of 38.50% (previously 37%; unchanged 9% WACC and 2% terminal growth). BH’s recent share price correction has squeezed its FY15 PER from 32x in early Sept to 28.4x now against a 30.4x Asian mean. Foreign patient volume to BH normalized recently. The stock is the best play on the foreign patient recovery theme. 

Expanded expectation for 3Q14 core profit—a new record

BH is now expected post record core earnings of Bt768m for 3Q14, up by 13% YoY and 24% QoQ (the SET will report YoY and QoQ profit slippage). Our model indicates unprecedented healthcare revenue of Bt4bn, up by 9% YoY and 6% QoQ (seasonality). Pricing is assumed to have risen YoY, while total patient volume would have been flattish. We model that GM inched up from 38.9% in 3Q13 to 39.0% in 3Q14 (38.5% in 2Q14), due to BH’s ability to pass through cost increases to high-end patients and intensity cases. Core margin expanded by 0.7% YoY and 2.8% QoQ to 19.3%, we believe.  

Foreign patients return to Thailand—BH is the best play

Despite martial law in Bangkok, foreign patient volume to BH was flat YoY in 3Q14 following YoY drops in 1H14 (foreign OPD admissions fell by 18% YoY for 1Q14 and by 6% for 2Q14; foreign IPD admissions fell by 12% YoY for 1Q14 and by 3% YoY for 2Q14). The foreign patient proportion of BH’s revenue normalized at above 60% for the quarter (it bottomed out at 58% in 1Q14). The historical record shows that its foreign volume rose by 10% in FY11 and 12% in FY12 on a stable political climate. Thus, our revenue growth assumption is 18% for FY15 (in line with BH’s data for FY12—a year of political stability). 

Utilization ramp-up implies greater efficiency 

Early this year, BH completed capacity expansion (58 new IPD beds, up 12%, 18 new ICU beds and an additional 80 OPD diagnostic rooms). Its utilization rate rose from 60% in 1H14 to 70% currently. The utilization rate could peak at 80-85%, given the patient volume recovery. Thus, we assume that greater economies-of-scale will fatten net margin by 50 bps YoY in FY15. Our model indicates a high ROE of 29% in FY15—far above the Asian hospital mean of 17%.

Healthy balance sheet 

With a Bt1.4bn CAPEX plan for FY14 (maintenance CAPEX and the stake in the Mongolian Hospital), BH will maintain a net-cash position at YE14. The healthy balance sheet will support new investments. BH plans to acquire an asset in a lower price segment in Thailand (perhaps in the provinces) and an offshore asset in the same price segment to tie in with its existing referral markets (BH has 22 offices in 16 other countries).