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Bangkok Dusit Medical Services

Earnings moving back up: Lift forecast, TP BUY

Bangkok Dusit Medical Services Plc (BGH)

Maintain BUY with new mid-2015 TP at Bt19/share. We continue to look at BGH

in a positive light, with earnings returning to an uptrend, driven by improving EBITDA

margin. BGH's long-term earnings growth path is promising undergirded by its large

hospital network covering all types of medical services and patient groups. We raise

our net profit forecast by 7percent for 2014 and 4percent for 2015, largely from a higher EBITDA

margin assumption. After the upgrade, by our estimates BGH will deliver 20% EPS

CAGR in 2013-15, similar to IHH, a large healthcare service provider in the region. Its

valuation in terms of PE to earnings growth is 1.7x vs. 1.8x for regional peers and 2.1x

for IHH. We maintain BUY on BGH and roll over our TP to mid-2015 to Bt19/share (from

Bt17.5/share).

Higher EBITDA margin in 2Q14. BGH reports that earnings QTD are growing strongly

at ~10% YoY vs. +12% YoY in 1Q14. The hospital is more upbeat about EBITDA margin

widening as cost controls begin to pay off. These include a freeze on staffing, individual

job expansion and rotation and lower marketing expense and have been in place since

4Q13. At the same time, cost pressure related to hospital expansion is eased as it now

has enough clinical and non-clinical staff for new hospitals coming up. The magnitude

of the YoY contraction in EBITDA margin is declining: from -3.4ppts in 2Q13, -3.3ppts in

3Q13, -1.5ppts in 4Q13 to flat in 1Q14. We believe the continued cost controls and

good revenue growth will show up in a YoY increase in EBITDA margin from 2Q14.

Buys Sanamchan Hospital group. BGH is purchasing all the shares of Sanamchan

Hospital (SNC), a 198-bed private hospital in Nakorn Pathom, plus the three hospitals

in its group (Figure 3). The cost will be Bt3.56-3.66bn depending on due diligence,

which is expected to complete in July 2014. The payment will be in cash, which should

pose no problem given its Bt3.6bn cash on hand. Even if this purchase was funded 100%

by debt, it would raise net debt to equity to only 0.5x (from 0.4x), still far below its

debt covenant ceiling of 1.75x.

We are positive about this transaction: 1) the price paid is not too high, working

out to Bt6.7mn/bed vs. Bt5-8mn/bed for a greenfield project (based on 550 beds for

SNC plus the three hospitals in its group); 2) SNC's group of hospitals will give BGH

entry into the western region of Thailand, where it currently has no operations; 3) SNC

is well known in its home Nakorn Pathom province with 62% of the market in terms of

beds; and 4) SNC's group of hospitals are already profitable. Though by our estimates

contribution will be little at less than 1% of BGH's net profit, the real benefit lies in the

expanded hospital network and more patient referrals within the group.

BGH says it can make its goal of 50 hospitals by 2015 with 7,000 beds. It now

has 43 hospitals: 31 already operating, nine in the pipeline and now three hospitals

from SNC (of the four, we do not include one in which it holds only 25%). BGH expects

to announce the addition of two new hospitals in 2H14 and five in 1H15. It is not

concerned about the supply of staff or cost pressure since its focus is on hospitals that

are already up and running (brownfield project).


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