Bumrungrad Hospital

Bumrungrad Hospital Plc (BH) 

 

Investment thesis

The share price correction, down 19% since its peak on 3 Sep 2015 and underperforming its peers in 4Q15 has priced in the transition period to superior earnings growth in 1H15 to the decelerating earnings growth in 2H15. We are now happy with BH’s valuations at FY16 PER of 37x, near the global PER mean and as the cheapest in the sector (43x for CHG and 39x for BDMS). Its normalized earnings growth in FY16 will outperform the SET. Thus, we have upgraded it to a BUY rating (from HOLD), a DCF-derived YE16 new target price of Bt250 (from Bt220) on a new 8.0% WACC (from 9.0% WACC) to bring it in line with BLS’ new 10.7% market cost of equity assumption (from 12.6%), and a 2% terminal growth rate. 

Time of organic growth in 2016 with SET outperformance

We forecast core earnings growth of 17% to BH for FY16—a continuation to outperform the mere low-single-digit growth for the SET’s (BLS coverage) core profit. Our modeled healthcare revenue growth is 13% for FY16, slightly above BH’s historical record of 11% CAGR for FY08-15 due to the temporary low base set by the impact of MERS in Jun 2015 and the Bangkok bombings Aug. The best quarter earnings of the year are expected in 3Q16 followed by 1Q16, 4Q16 and 2Q16. 

Strong Middle East patients and added markets 

Foreign patient revenue growth has proven strong at 11% CAGR for FY10-15 (jump 23% YoY for 9M15). With 60-65% of international revenue contribution, UAE and Oman have remained the top-two highest revenue contributors at around 14% of BH’s revenue in FY10-15. Also, revenue growth from Myanmar and Cambodia has proven strong, as the revenue contributions in FY15 jumped to 9% and 4% respectively. 

Most efficient hospital in the region 

Its IPD utilization rate increased from 66% in FY14 (new IPD capacity completion in 1H14) to 70% in FY15. 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 to 20.5% in FY16, attaining leadership for the region. ROE would be sustainable high at 31% in FY16—far above the Asian hospital mean of 25%.

Healthcare balance sheet to support new investments

Its balance sheet is very healthy as BH has been net cash since 3Q12. With a Bt3bn CAPEX plan for FY16, BH will maintain net cash at YE16. Most of CAPEX in FY16 will be used to build a new clinic in Yangon, Myanmar (opens mid-2016) and expand outpatient capacity at Sukhumvit Soi 1 (17% of extra space to 176k sqm by YE17). Its Petchaburi Road land bank has received Environmental Impact Evaluation Bureau approval to build a new hospital, but BH is in no rush for construction to be completed, in our view. Thus, the strong balance sheet will support new investment and opportunity without recap risk.