Bangkok Dusit Hospital

Investment thesis

Now is a good point of entry ahead of a new phase of accelerated top-line growth and margin expansion following the opening of new hospitals in 2H14. BGH currently trades at an FY15 PER of 33x. It deserves to trade at a PER of 38x (2SDs above its FY06-13 mean), we believe, given forecast core profit growth of 20% for FY15 and scope for upside from new acquisitions. Our BUY rating stands with a DCF-derived YE15 target price of Bt21 (8.9% WACC and 2% terminal growth). 

Inorganic growth from new capacity  

Apart from four acquired hospitals, (Sanamchan, Thepakorn and Muangraj hospitals in August and Siriroj Hospital in Oct), four greenfield hospitals started operating in 2H14 (Bangkok Chiangmai, Bangkok Hospital Khon Kaen, Royal Phnom Penh Hospital and Bangkok Hospital Chinatown).Total IPD capacity rose 16% to 6,521 beds. By YE16, BGH plans to open another six greenfield hospitals—18% additional IPD capacity to 7,674 beds (Figure 8). New capacity will sustain double-digit long-term revenue growth. The new hospitals will each be launched in phases in order to control operating costs and depreciation.  

Resumed double-digit YoY growth in healthcare revenue 

Healthcare revenue posted 11% YoY growth for Oct-Nov (7% growth in 3Q14). Thus, healthcare revenue should rise 14% in FY14 to Bt56bn. Strong top-line growth will drive core profit expansion of 23% YoY in 4Q14, we expect. For FY15, management targets a healthcare revenue rise of 13-14% (10% from existing hospitals and 3-4% at new hospitals that open FY14-15). Note that we assume 16% top-line growth in FY15). 

To have 50 hospitals by early FY16

BGH currently has 43 hospitals in its portfolio (37 operating facilities and six under construction). By early FY16, management targets acquiring a further seven hospitals. The acquisition targets are profitable operations in the Northern and Northeastern regions. A clean balance sheet will support new acquisitions. Even following the issuance of a convertible bond, the net gearing ratio remained low at 0.5x at end-Sept with a TRIS credit rating upgrade from A to AA-.  

What’s next beyond 50 hospitals?

Beyond FY16, when BGH will have hospitals across Thailand, it will run a ‘Hub and Spoke model” (patient referral system and enhanced efficiency from economies-of-scale). Foreign patient revenue is guided at 40% (28% in 9M14). EBITDA margin should be at least 24% (23% in FY14-15). BGH plans to boost margins through fat-margin non-hospital businesses (NM of 15% for non-hospital business versus 13% for hospital business). Non-hospital revenue is targeted to double from Bt1.6bn in FY14 to Bt3bn within the next couple of years.