Brokers caution on continued euphoria of buying into healthcare as rising cost could eat into margins

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Investors looking into putting their money to work by investing in the healthcare sector as shares of hospital operators such as Bangkok Dusit Medical Services Plc (BDMS) and Bumrungrad Hospitals Plc (BH) trade at levels not seen in years, should rethink their strategy as it is likely that the earnings of healthcare operators are likely to underperform during the latter half of 2022.

“2H22 through 2023, we see cost inflation pressures potentially squeezing some hospitals’ GMs. We prefer high-end plays, BDMS and BH, premised on the release of pent-up fly-in demand and pricing power,” Phoowadol Phoosodngern, sector analyst at Bualuang Securities said.

Shares of hospital operators such as Bangkok Dusit Medical Services Plc (BDMS), Thailand’s leading private hospital operator, are trading at an all-time high, while that of BH, Thailand’s most high-end hospital, has been trading as some of the most active stocks traded for the past few weeks.

Shares of BDMS trades at all time high in September 2022

“The Healthcare sector has risen 31% YTD (year-to-date) compared to 2% YTD slippage for the SET. Healthcare has meaningfully outperformed on stronger fundamentals, a flight to quality, and relative valuations. But the 2H22 outlook isn’t so favorable,” Phoowadol says.

He says that with the sector had benefited from the Delta variant in H1 2021 (record H2 2021 numbers for many stocks) and the Omicron variant in H1 2022. But there isn’t currently a new COVID-19 variant causing panic and mass hospitalizations, so most of the stocks under coverage will mark YoY and half on half drop in revenue and profits for H2 2022.

“Our models point to aggregate H2 2022 Healthcare coverage core earnings of 4.5 billion Baht, down by 49% YoY and 43% half-on-half. Only BH looks set to mark YoY and half-on-half profit growth for H2 2022. BDMS, Bangkok Chain Hospital Plc (BCH), and Chularat Hospital Plc (CHG) will post YoY and half-on-half dives,” he said.

Focus on High End Only

Phoowadol says that if investors have to buy shares, then they should focus on the high-end ones that are likely to benefit from medical tourism from outside Thailand.

“Although we expect the release of fly-in demand among medical tourists to continue, we think cost inflation and competition may become issues going forward. We expect high-end hospitals, BDMS and BH, to sustain or build gross margins into 2023, due to rising fly-in business and because many of their fly-in patients require intensity care, which carries fat margins. In contrast, BCH and CHG face GM squeeze tied to drug cost inflation, which is likely to persist into 2023.”

He says that the projection for BH during 2023 core profit is set for 4.5 billion Baht, up 12% YoY (up 15% from the 2019 number), supported by full recoveries in both Thai and fly-in revenue. A 22.5% core margin is expected for 2023, up 0.8% YoY. BH’s healthtech products—such as Rezum (benign prostatic hyperplasia treatment; no inpatient admission required) and IceCure (a breast tumor treatment; less downtime and greater patient volume capacity) will boost both margin and patient numbers in the long-term.

As for BDMS, Phoowadol says that in the short-term, H2 2022 earnings look set to decline Half on half and YoY. Furthermore, BDMS’s valuation metrics are stretched core PERs of 47.1x for 2022 and 43.4x for 2023 (1SD above its long-term mean), far above the 33.4x average for Bualuang’s healthcare coverage. “We suggest letting profits run for the moment, but our YE 2022 target price is only 27 Baht (WACC of 7.0% and a terminal growth rate of 2%).”

He says that healthcare has meaningfully outperformed on stronger fundamentals. But the H2 2022 outlook isn’t favorable.

“Among our coverage, only BH looks set to mark YoY and HoH profit growth for H2 2022. BDMS, BCH, and CHG will post YoY and HoH dives.”

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