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Bangkok Dusit Medical Services

4Q13 earnings were as expected; margins should fatten YoY in 2Q14

Bangkok Dusit Medical Services Plc (BGH)

In line with our estimates

BGH announced a net profit of Bt1.4bn for 4Q13, up 2% YoY but down 10% QoQ. Excluding a Bt17m gain on a fair value reappraisal for an investment in The Medic Phama Co Ltd (a medical manufacturing firm), core profit would have inched up 1% YoY. The result was in line with our estimate and the consensus. FY13 net earnings were Bt6.3bn, down 20% (also in line with expectations).

Results highlights

The flat YoY profit was due to core margin squeeze of 71 bps to 11.2%, which offset the effect of healthcare revenue growth of 9% to Bt13bn. Core margin contracted on a higher SG&A/sales ratio (from 20.7% in 4Q12 to 21.4%). Healthcare revenue comprised 72% Thai patients (up 8% YoY) and 28percent foreigners (up 9% YoY). In 4Q13, patient volume rose 3% YoY; pricing growth was 6%. Healthcare GM fell by 2.6% YoY and 3.8% QoQ to 31.1%. Profit-sharing from associates jumped 47% YoY to Bt252m. The QoQ earnings contraction was due to seasonality (healthcare revenue fell by 4% QoQ and core margin by 75 bps). The utilization rate dropped from 75% in 3Q13 to 66% in 4Q13. Net gearing at YE13 was flat QoQ at 0.4x.

Outlook

1Q14 profit will probably decline from the impressive number posted for 1Q13—BGH reported core margin of 16.2% in 1Q13, which then slipped to 10.5% in 2Q13 (high SG&A expenses tied to its aggressive expansion last year). Healthcare revenue in 1Q14 is expected to increase YoY, but margins will decline. On a QoQ basis, 1Q14 earnings should rise on seasonality.

What's changed?

We maintain our FY14 profit growth projection unchanged at 7%. Our healthcare revenue expansion assumption is 9%, the same rate as for FY14, when Bangkok was the scene of the Red Shirt Uprising. We conservatively forecast that NM will fall 20 bps to 12.2% in FY14. Note that our model is 6% below the consensus forecast.

Recommendation

We expect BGH's core margin to expand YoY in 2Q14 onward (core margin bottomed out at 10.5% in 2Q13). Proof of a margin recovery should catalyze the share price. There is only limited margin downside risk to our forecast, as BGH's strategy is to boost margins through efficiency improvements. Our BUY rating stands with a YE14 target price of Bt144, a 5% discount to DCF value (9.6% WACC and a 2% terminal growth rate). We recommend accumulating the stock ahead of news of margin expansion in 2Q14.








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