Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc 

 

We believe BDMS’ earnings bottomed in 2Q15 and will head back up in 2H15, underwritten by improving operations at provincial hospitals. Over the past three month, BDMS’ share price has fallen 5% vs. +28% for BH, implying the weaker earnings growth in 1H15 is priced in. Given the better earnings ahead for BDMS and BH’s overshoot, we see BDMS positioned as an attractive laggard play. We maintain BUY with a new TP of Bt24/share (rolled over to mid-2016). 

 

Improving operations at provincial hospitals. Slow operations at existing hospitals in the provinces (40% of revenue) were the major factor behind the weak earnings in 2Q15. BDMS says that on top of the economic slowdown, operations of hospitals in tourist destinations such as Pattaya (6% of revenue) and Phuket (5% of revenue) were hurt by the drop in Russian patients, a high-yield segment, as Russia’s economy nose-dived. BDMS says the situation is better: revenue growth at Bangkok Hospital Phuket has come back up from the negatives in 2Q15 and is now flat. 

 

Excluding newly-opened hospitals, EBITDA is strong. EBITDA margin was weak at 20.0% in 2Q15 (from 20.7% in 2Q14 and 24.7% in 1Q15). BDMS said the main drag is slow operations at 13 newly-opened hospitals where EBITDA is still in the red, with operations of existing hospitals still strong. Excluding the newly-opened hospitals shows a 2Q15 EBITDA margin of 21.6%, up from 21.3% in 2Q14 (but down from 26.1% in 1Q15 on seasonality). BDMS remains focused on improving efficiency and controlling costs at existing hospitals and raising revenue from its non-hospital ventures to help offset the losses from newly-opened hospitals. Revenue contribution from its non-hospital ventures - a laboratory, pharmaceuticals, food supplements and medical supplies and equipment - grew to 4% of revenue from hospital operations in 1H15 from 3% in 1H14. 

 

Three new hospitals in the pipeline. BDMS is operating 41 hospitals with 7,394 structured beds. The recent acquisition of Muangraj Hospital in Ratchaburi (125 beds) is expected to complete in September; this hospital will not be a drag on overall operations since it is already in the black. BDMS is developing two greenfield projects: 1) Paolo Rangsit Hospital in Bangkok (150 total beds with 59 in the first phase) in 2016 and 2) Jomtien Hospital in Pattaya (250 total beds with 100 in the first phase) in 2017.  

 

Maintain BUY with a new TP of Bt24/share (rolled over to mid-2016). Compared to direct peer BH, BDMS’ earnings were weaker in 1H15, affected by the slow economy and losses from newly-opened hospitals. However, over the past three month, BDMS’ share price decreased 5% vs. a surge of 28% for BH, implying negatives are priced in. BH’s share price overshoot has widened the valuation gap (32x 2016PE for BDMS and 41x 2016PE for BH) and this positions BDMS – which is looking at better earnings ahead - as an attractive laggard play. We maintain BUY and raise our TP to Bt24/share (from Bt23/share) as we roll valuation over to mid-2016 (from end-2015).