Bangkok Dusit Medical Services
In the pink of health with solid growth path BUYBangkok Dusit Medical Services Plc (BGH)
- Strong prospects with 15% revenue growth in 2013, expansion on track and long-term goal of 50 hospitals with 6,000 beds by 2015.
- Maintain BUY with new DCF-based 2013 TP of Bt180/share. Steady improvement in ROA provides potential long-term earnings upside.
15% revenue growth in 2013. BGH targets 15% revenue growth in 2013 (vs. 17% organic growth in 2012), based on: 1) 8% growth in revenue intensity and 2) 7% growth in volume. Despite strong revenues, BGH conservatively targets flat or a slight increase in EBITDA margin in 2013 because of higher costs brought by opening a new hospital, Bangkok Hospital Udon, in December 2012. The magnitude of the effect of the higher labor cost will be lower, as the staff compensation base was adjusted in 2012 in line with the government policy of raising minimum wage. January gave a good start to the year with revenue growth of 15% YoY.
Rebranding KDH to "Samitivej Hospital". After boosting its holding in Krungdhon Hospital Pcl. (KDH) to 44.96% (from 20.01%) in January, BGH is rebranding the 150-bed private hospital "Krungdhon Hospital" to "Samitivej Thonburi Hospital", with the process scheduled to wind up in May 2013. This will shift that hospital's positioning from B+ to A. The hospital is sited in a prime area in Thonburi, where healthcare demand is growing with urbanization. BGH already has one hospital there - Phyathai 3 - but we do not expect cannibalization due to differing patient segmentation.
Expansion on track - four hospitals in the pipeline. BGH has four new hospitals scheduled to start operations in 4Q13-2014: 1) the 120-bed Royal Phnom Penh Hospital in Cambodia, 2) the 100-bed Bangkok Hospital Phuket 2, 3) the 200-bed Bangkok Hospital Chiang Mai and 4) the 143-bed Soonthornphu Hospital in Rayong. BGH maintains its long-term goal of 50 hospitals with 6,000 beds by 2015 from 30 hospitals and ~4,300 beds now. In Thailand, BGH's strategic areas are the north and northeast, as these areas are gateways to upper Asean countries Myanmar, Laos, Cambodia and Vietnam, all potential markets upon setup of AEC. It is also interested in setting up hospitals in Myanmar, Laos and Vietnam.
BGH - Potential upside from better ROA. We see long-term earnings upside for BGH as it improves its asset utilization. Aggressive acquisitions in the past have given it a larger asset base that have in turn given a relatively low ROA of 9.2% in 2012 compared to 13.2percent for direct peer BH. We believe steady improvement in asset utilization through sharing medical equipment, creating a cooperative specialty care network and patient referral among hospitals will lift ROA. To ascertain the possible upside to earnings should ROA improve more than we anticipate, we have run a workout using BH as a benchmark since its operations are at an optimal level as a standalone hospital with a long track record. This suggests 7-36% earnings upside for BGH in 2013-17 if its asset utilization improves to bring ROA to the same level as BH's.
BUY rating with new DCF 2013 TP at Bt180/share. To better reflect its long-term prospects, we switch our valuation to discounted cash flow (DCF) from PE multiple and this raises TP to Bt180/share from Bt135/share. We maintain BUY based on strong earnings growth prospects and potential upside from a better ROA. BGH's valuation is not rich, as it is trading at 1.3x PEG vs. 1.6x for regional peers.