Cost pressure easing, BUY maintained at TP Bt175/share. Cost pressure from BGH’s rapid expansion is easing and BGH is now more focused on controlling costs at existing hospitals. Some improvement was already seen in 4Q13 when the YoY contraction of EBITDA margin was lower. In our view, 2014 earnings are unexciting because of the cost of hospital expansion that will eventually undergird growth, thus only a short-term pain to achieve long-term gains. We maintain BUY with DCF target price of Bt175/share.
2014 target revenue growth 13%, consisting of 10% organic growth and 3% growth from new hospitals. On the profitability side, BGH estimates an EBITDA margin at 22-23% (slight increase from 22% in 2013) and net profit margin at 12% (same as 2013). BGH said revenue growth in the first two months of the year was 10% YoY, in the main from 6-7% YoY patient volume growth.
Cost control is key, first evidence seen in 4Q13. In the past, BGH’s growth was top-line driven through mergers and acquisitions. However, revenue growth was slow at 11% in 2013, pulled down by the slowed economy while costs and expenses were driven up by the full staffing of new hospitals, resulting in weak core earnings growth of 6% in 2013. In 2014, BGH is shifting its focus to improving EBITDA margin via a cost control program that includes a freeze on staffing, individual job expansion and rotation and lower marketing expense. BGH does not expect to have cost pressure related to new hospitals since it now has enough clinical and non-clinical staff for the six hospitals it is opening this year. The initial positive from BGH’s cost control program was seen in 4Q13 with a lower magnitude in the YoY contraction of EBITDA margin: -1.5ppts in 4Q13 vs. -3.4ppts in 2Q13 and -3.3ppts in 3Q13.
Putting off opening of some new hospitals this year. BGH opened two hospitals last year (Samitivej Thonburi Hospital in May 2013 and Bangkok Hospital Phitsanulok in October 2013), bringing its hospitals to 31. This year, however, the scheduled opening of five new hospitals will be postponed by three to six months (Figure 2) due to the unfavorable climate created by the weaker economy and politics. Bangkok Hospital Chinatown is opening as scheduled: its pre-opening was in February and official opening will be in May. Including all hospitals in the pipeline, BGH will be operating 40 hospitals. BGH maintains its long-term goal of 50 hospitals but this may not be as rapid as originally planned as it has decided to focus on controlling costs.