Brokers recommend 'buy' for BGH group

Analysts have reiterated their recommendations on Bangkok Dusit Medical Services (BGH) citing efficient cost controls, economies of scale through shared services and expected returns from earlier investments.

Fifteen of the 17 brokers in the Securities Analysts Association (SAA) have maintained "buy", "long-term buy" and "buy on weakness" recommendations. The consensus target price is in a range of Bt40.50 to Bt58.

The BGH group has 19 hospitals with a combined total of 2,959 beds. Bangkok Hospital has 13 hospitals with 2,018 beds, Samitivej Hospital has 3 hospitals with 775 beds, BNH Hospital has 86 beds and Royal International has two hospitals with a total of 80 beds.

The five major revenue contributors to BGH are Bangkok Hospital Medical Centre, Samitivej Hospital, Bangkok Hospital Pattaya, Bangkok Hospital Phuket and BNH Medical Centre.

Mergers and acquisitions have been BGH's main growth strategy.

Risk factors to future growth are the economic slowdown affecting consumers' purchasing power that could reduce demand for premium healthcare services, tougher competition that could make Thailand a less attractive option for people from overseas needing medical treatment. Also, failure to achieve further cost reductions and any delay in BGH's investment programme would negatively affect the group's cash flow.

The company recorded first-quarter net profit of Bt696.99 million, up 64.79 per cent year on year and 60.13 per cent quarter on quarter.

Tisco Securities, which is not included in the SAA's consensus, said in a note that BGH is its top pick among listed Thai hospitals.

It has set a 12-month target price at Bt46.50.

"The company is starting to benefit from earlier investments and its focus on improving efficiency. This has resulted in a higher operating margin, most of which will go to its bottom line and also boost cash flow. We have revised up our forecasts and reiterate our "buy" advice for Thailand's biggest hospital group," the broker said.

As a longer-term cost-efficiency solution, the group has created a shared services department, namely National Health Services (NHS) to take care of the group's procurement, inventory system and laboratory services. This contributed to notable improvement in margins in the first quarter of 2008.

The shared service concept has been expanded to encompass the group's human resource, marketing and IT functions.

The group refinanced Bt7 billion worth of individual hospital loans with group loans and debentures in March.

BGH expects this will lead to savings of 1-1.5 per cent in interest costs from this quarter onward. Furthermore, the group will now manage cash from the centralised unit, which should mean less need for short-term loans.

Group management has said there are no major investment plans in the near future although several small projects are in the pipeline. These include the Royal Phnom Penh Hospital with 100 beds, which will be opened in late 2009. The Royal Bangkok Abu Dhabi Hospital with 30 beds, which will be in operation next year, and Bangkok Hua Hin Hospital with 50 beds, which will be opened in 2010, the broker said.

In addition, the group will re-tain its current holdings in Ramkhamhaeng Hospital and Prasith Pattana, the operator of Phyathai Hospitals.

According to BGH management these two hospital groups could provide an opportunity for BGH to exploit the lower-tier market and possibly pool shared services in the future, Tisco said.

The broker expects BGH to reap the benefit from its previous huge investment programme from now on. The cost-reduction programme should help improve its margins while refinancing should reduce its interest burden.

"A basic sensitivity analysis suggests that a 1-per-cent rise in its operating margin would increase net profit by 6.9 per cent, compared with a 5.4 per cent increase for Bumrungrad Hospital and Kasemrad Hospital. And we think that a 1-per-cent improvement for BGH should be much easier to achieve than for a hospital that is already highly efficient such as Bumrungrad," the broker said in its note.

Tisco has revised up its 2008-2010 earnings targets by 17.2 per cent, 15.5 per cent and 14.5 per cent to Bt2.32 billion, Bt2.7 billion and Bt3.27 billion, respectively to reflect these operational changes.

Phillip Securities (Thailand), which is included in the SAA consensus has a "buy" recommendation on BGH with a 12-month fair value of Bt47.60 per share.