Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BDMS) 

 

We estimate 3Q15F core profit of Bt1.8bn, flat YoY but up 24% QoQ. Disappointingly, though revenue grew, EBITDA margin was poorer than we anticipated, with a drag from losses at newly-opened hospitals. This requires a 9% cut in earnings for 2015-16 and a DCF new TP is Bt23/share (from Bt24/share). Despite the earnings downgrade, we maintain our BUY call on a view that earnings bottomed in 2Q15 and it is poised to get in on solid growth from AEC. 

Positive: Better operations at existing hospitals… BDMS says operations at existing hospitals are better, with revenue growth of 6% YoY in 3Q15, slightly higher than the 5% YoY in 1H15. Key is its three flagship hospitals in Bangkok (Bangkok Hospital, Bangkok Heart Hospital and Wattanaosoth Hospital, together accounting for 21% of 1H15 revenue) where revenue growth was strong at 11% YoY. Operations are also improving in tourist destinations in the eastern region, at Pattaya, Rayong and Trad. Including revenue from 14 newly-opened hospitals (less than two years in operation), BDMS’ total revenue grew 12% YoY in 3Q15. 

Negative: This is offset by weak EBITDA margin. EBITDA margin will continue to soften YoY in 3Q15 since the improvement at existing hospitals is not able to fully offset losses from the newer ones. In 3Q15, it had 14 newly-opened hospitals (vs. six in 3Q14) and seven of these reported negative EBITDA that we view operational ramp-up has been slow because of the weak economy. Average bed utilization in 9M15 for newly-opened hospitals was 45%, below the 69% of existing hospitals. 

2015-16F cut by 9%. We cut core earnings forecast by 9% in 2015-16 to factor in the weaker EBITDA margin, now assuming 21.3% in 2015 (down from 22.1%) and 22.0% in 2016 (down from 22.8%). EBITDA margin is expected to widen in 2016 as the economy gets back on its feet, fostering operational improvement; as well, there will be less of a hit from new investment since BDMS plans to open only one new hospital, Paolo Rangsit Hospital, in 2016. After the earnings revision, we expect core earnings growth of 3% YoY in 2015 and 17% YoY in 2016.  

3Q15 preview. We estimate core profit at Bt1.8bn, flat YoY but up 24% QoQ. Within this is estimated revenue of Bt15bn, up 11% YoY and 9% QoQ and an EBITDA margin of 21%, down from 21.6% in 3Q14 but up from 20% in 2Q15. 9M15 core earnings will account for 77% of our new full-year forecast vs. the 76% historical average. 

BUY for better earnings ahead. In the near term, BDMS share price will be under pressure from earnings downgrades – we are 10% below the street for 2015 and 9% in 2016. However, we maintain our BUY call on BDMS with new TP of Bt23/share (down from Bt24/share) in the belief earnings hit bottom in 2Q15 and will climb into 2016. BDMS also has solid growth opportunities from the startup of AEC in December 2015 since it has hospitals in strategic locations Cambodia, Udonthani and Chiang Mai.