Healthcare

Healthcare valuation: check your position 

 

The Thai healthcare sector has surged 25% YTD vs. an 8% contraction for the SET, in the main lifted by the huge 78% leap in BH’s share price brought by enthusiasm over its strong earnings and inclusion in FTSE mid-cap Asia Pacific ex. Japan index. Though we remain positive for the long horizon, at this point we see BH’s valuation as demanding and are a bit more cautious. On this basis, we suggest investors switch to a play with a more attractive valuation such as BDMS. 

 

BH largest sector outperformer YTD. Thus far in 2015, the Thai healthcare service index has risen 25% against an 8% contraction for the SET – the greatest boost has been given by BH, whose share price has soared 78% YTD. We believe the market’s enthusiasm for this counter stems from BH’s strong earnings growth in 1H15, brought by higher revenues and wider EBITDA margin as international patients – the high-yield segment – return. Another boost to sentiment was provided by the inclusion of BH in FTSE mid-cap Asia Pacific ex. Japan index, announced on September 2, 2015. 

 

Valuation check suggests BH valuation is demanding. BH share price has far overshot TP and our valuation check in Figures 1-4 suggest its valuation is now demanding compared to direct Thai peer BDMS and even against regional peers. BH is trading at 46x 2016PE, well above the 33x for BDMS and 32x regional peer average. BH’s 2016 PE-to-earnings growth is 3.5x – again far higher than 1.9x for BDMS and regional peer average, implying BH’s valuation against prospective earnings growth is less attractive than peers. In terms of PB matrix, BH is trading at 12.5x 2016 PB vs. 5.5x for BDMS and 5.1x regional peer average and BH’s 2016 PB-to-ROE is at 0.44x, higher than 0.31x for BDMS and 0.32x regional peer average. 

 

Recommend switch from BH to BDMS on more attractive valuation. Although we like BH’s fundamentals – operations are strong and EBITDA margin healthy, we believe the positives are priced in and valuation stretched, trading above our TP, suggesting we take a more cautious stance. We recommend investors switch into BDMS, our top pick in the sector, since the wider valuation gap positions BDMS as an attractive valuation play, with better earnings in 2H15 from improving operations at provincial hospitals. We maintain BUY on BDMS with mid-2016 TP at Bt24/share.