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Bangkok Dusit Medical Services

Turnaround from 1Q14 on BUY

Bangkok Dusit Medical Service Plc (BGH)

- 1Q14 profit to grow 2%yoy and 40%qoq

As a result of the political turmoil, January service revenue grew by only

9%yoy (targeted at 12-13%). However, it returned to normal and

reached the target in February and March. Thus, 1Q14 service revenue

grew by 11.5%yoy (revenue from Thai patients grew by 14%yoy: Thai

patient volume increased by 9%yoy and income per treatment rose by

5%yoy; revenue from international patients grew by 4%yoy: income per

treatment rose by 4%yoy while international patient volume stayed

flat). BGH’s expense has jumped since 2Q13, mainly due to preparation

on medical teams and personnel for 20 new hospitals planned to be

opened within the next three years. However, as BGH has started its

efficient expenses control policy since early-2014, SG&A is expected to

increase by 12.2%yoy, slightly more than revenue growth. Thus, we

project BGH’s normalized profit (excluding share of profit from

associates) to grow by 7.5%yoy (the first growth since 2Q13). However,

share of profit from associates would drop from B312m in 1Q13 to

B225m in 1Q14; in 1Q13, RAM (BGH holding 38.24percent stake) booked

B160m profit from selling of investment. Overall, we project 1Q14 net

profit at B1,985m, growing 1.9%yoy and 40%qoq.

- 2Q14 profit to skyrocket yoy

Though 2Q14 (low season) profit is likely to be the year’s lowest, 2Q14

net profit growth is projected to be most outstandingly yoy. This is

mainly due to 2Q13 profit base is fairly low as a result of preparation on

medical team and hospital renovation in order to request JCI

accreditation, while BGH is would have a good control on expense in

2Q14. Cost of operations and depreciation are expected to increase in

2H14 as a result of the opening of six new hospitals. Thus, 2H14

normalized profit is expected grow at the same rate of revenue. Overall,

we revise up FY2014-2015 net profit forecast by 7%p.a. FY2014

normalized profit is projected to grow by 11.3%yoy.

- Turnaround starts. Buy

BGH’s profit is expected to make a turnaround from 1Q14 on. We revise

up FY2014 fair value (DCF) from B13.9 to B17.5 (raising terminal growth

rate from 3% to 4.5%), implying 18.7% upside. BGH’s plan to acquire

10 hospitals in three years (mainly in provinces) which would raise the

fair value has not been included in our earnings forecast and fair value.

We upgrade our recommendation from holding to buying.

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