Bangkok Chain Hospital
Earnings rising, valuation discount to peers BUY
Bangkok Chain Hospital Plc (BCH)
The long wait for recovery is nearly over for BCH as it marches into a new growth cycle with 22% core earnings CAGR for the next three years. The World Medical Center (WMC) is making the turn from a drag to a driver as losses come down and is poised to generate profit as soon as 2018 – a year earlier than the previously expected 2019. Though earnings are on the way up, BCH is trading at 18x 2016 EV/EBITDA, below the regional average of 21x, and this comes down to 14x in 2018. We put BCH as our lead pick in the Thai healthcare sector.
WMC in the black as soon as 2018, not 2019. Yesterday’s analyst meeting contained the good news that losses are less at high-end WMC, thus burdening BCH less and leading to earnings improvement. A positive development is the appointment of a new hospital director, Professor Adisorn Patradul M.D., in September last year, who is outlining a clear strategy path. WMC is developing “centers of excellence”, ranging from cardiac, to orthopedics and advanced surgery, working closely with specialists from Chulalongkorn Hospital. It is working with governments and health agencies in several countries to bring in more international patients, a high-yield segment accounting for 38% of revenue in 2015, with the Middle East, China, Myanmar and Cambodia leading the list. This is bearing fruit, as seen in the 40% YoY rise in revenue to Bt321mn in 2015 and a cut in losses to Bt234mn from Bt287mn in 2014 - beating our estimate of Bt253mn. We believe these developments will continue and now expect WMC to show profit in 2018, ahead of the earlier forecast of 2019, though slower than management’s guidance of 2017 as we are cautious with regards to the higher costs that will come from setting up these centers of excellence.
Rising SC revenue is on top. Growing revenue from the social security scheme (SC) will be another key driver for BCH. In 2016, BCH expects 120K additional insured persons (+17% YoY): 1) 20K at Kasemrad Sriburin Hospital after it returned to the program after leaving it in 2014, 2) 50K at Karunvej Rattanatibeth Hospital and 3) 50K at Kasemrad Chachoengsao Hospital. These additions will push SC revenue up 15% YoY to account for 38% of BCH’s revenue in 2016.
Earnings upgrade. 22% EPS CAGR in 2015-18. We have raised earnings by 15% in 2016, 14% in 2017 and 13% in 2018 to factor in: 1) the earnings beat in 2015, 2) better operations at WMC with Bt163mn loss in 2016, Bt70mn loss in 2017 and then a profit of Bt38mn in 2018 (up from our previous forecast of losses of Bt182mn in 2016, Bt108mn in 2017 and Bt43mn in 2018) and 3) higher SC revenue. Our new forecast reflects a strong turnaround in earnings with a 22% CAGR for the next three years.
Valuation at a discount. BUY with end-2016 DCF TP at Bt12/share. Earnings are on the way up but BCH is trading at 18x 2016 EV/EBITDA, below the regional average of 21x – and it comes down to 14x in 2018. In our view, EV/EBITDA is better than PE as a comparative valuation as earnings are still being dragged down by losses at WMC (which are ending). We rate BUY with new end-2016 DCF TP of Bt12/share (from Bt10), consisting of Bt10.5/share for BCH excluding WMC and Bt1.5/share for WMC, and put the stock as our lead top pick in Thai healthcare sector, followed by BDMS. The long wait for recovery is nearly over for BCH as it marches into a new growth cycle with 22% core earnings CAGR for the next three years. The World Medical Center (WMC) is making the turn from a drag to a driver as losses come down and is poised to generate profit as soon as 2018 – a year earlier than the previously expected 2019. Though earnings are on the way up, BCH is trading at 18x 2016 EV/EBITDA, below the regional average of 21x, and this comes down to 14x in 2018. We put BCH as our lead pick in the Thai healthcare sector.
WMC in the black as soon as 2018, not 2019. Yesterday’s analyst meeting contained the good news that losses are less at high-end WMC, thus burdening BCH less and leading to earnings improvement. A positive development is the appointment of a new hospital director, Professor Adisorn Patradul M.D., in September last year, who is outlining a clear strategy path. WMC is developing “centers of excellence”, ranging from cardiac, to orthopedics and advanced surgery, working closely with specialists from Chulalongkorn Hospital. It is working with governments and health agencies in several countries to bring in more international patients, a high-yield segment accounting for 38% of revenue in 2015, with the Middle East, China, Myanmar and Cambodia leading the list. This is bearing fruit, as seen in the 40% YoY rise in revenue to Bt321mn in 2015 and a cut in losses to Bt234mn from Bt287mn in 2014 - beating our estimate of Bt253mn. We believe these developments will continue and now expect WMC to show profit in 2018, ahead of the earlier forecast of 2019, though slower than management’s guidance of 2017 as we are cautious with regards to the higher costs that will come from setting up these centers of excellence.
Rising SC revenue is on top. Growing revenue from the social security scheme (SC) will be another key driver for BCH. In 2016, BCH expects 120K additional insured persons (+17% YoY): 1) 20K at Kasemrad Sriburin Hospital after it returned to the program after leaving it in 2014, 2) 50K at Karunvej Rattanatibeth Hospital and 3) 50K at Kasemrad Chachoengsao Hospital. These additions will push SC revenue up 15% YoY to account for 38% of BCH’s revenue in 2016.
Earnings upgrade. 22% EPS CAGR in 2015-18. We have raised earnings by 15% in 2016, 14% in 2017 and 13% in 2018 to factor in: 1) the earnings beat in 2015, 2) better operations at WMC with Bt163mn loss in 2016, Bt70mn loss in 2017 and then a profit of Bt38mn in 2018 (up from our previous forecast of losses of Bt182mn in 2016, Bt108mn in 2017 and Bt43mn in 2018) and 3) higher SC revenue. Our new forecast reflects a strong turnaround in earnings with a 22% CAGR for the next three years.
Valuation at a discount. BUY with end-2016 DCF TP at Bt12/share. Earnings are on the way up but BCH is trading at 18x 2016 EV/EBITDA, below the regional average of 21x – and it comes down to 14x in 2018. In our view, EV/EBITDA is better than PE as a comparative valuation as earnings are still being dragged down by losses at WMC (which are ending). We rate BUY with new end-2016 DCF TP of Bt12/share (from Bt10), consisting of Bt10.5/share for BCH excluding WMC and Bt1.5/share for WMC, and put the stock as our lead top pick in Thai healthcare sector, followed by BDMS.
