Mitra Keluarga Karyasehat, Still The Best Listed Hospital Chain In Indonesia

Mitra Keluarga has indicated that its patient volume in 1Q16 is stronger than that in 1Q15. We believe middle-income patients may slowly return to private hospitals due to the congestion and long queues at public hospitals. Despite a delay in its new hospital opening in Bintaro to 2H17, Mitra Keluarga remains our Top Pick for the Indonesian hospital sector given its very strong balance sheet, excellent operating cash flow, and potentially higher dividend payout ratio of 60% in 2016. Maintain BUY with a revised IDR3,100 TP (28% upside).

Higher patient volume in 1Q16
Management indicated that patient volume in 1Q16 is c.10% higher YoY, with some of its hospitals’ bed occupancy rates already in excess of 80% due to the outbreak of dengue fever. Even without the dengue fever, we believe middle-income patients may slowly return to private hospitals again, due to the congestion and long queues at public hospitals.

Higher dividend payout ratio
As Mitra Keluarga Karyasehat (Mitra Keluarga) has very strong operating cash flow generation, management aims to increase its dividend payout ratio to 60% this year (vs c.55% in FY15). Its balance sheet is very strong with a debt-free, net cash position.

Remain BUY
We slightly reduce our TP to IDR3,100 (from IDR3,150, 28% upside), as we trim FY16F-17F net income by 5%/5% respectively to reflect lower bed occupancy rates. Our TP is based on DCF valuation with WACC of 8.8% and 3% TG. The key risk to our call would be lower-than-expected bed occupancy rates at its hospitals in the Kenjeran and Kalideres regions.

Delay in Bintaro hospital opening to 2H17
The new hospital in Bintaro (greater Jakarta region) would start construction in May 2016 and is slated to commence operation in 2H17. Despite the delay, its tight cost control in drug procurement would likely result in relatively stable gross margins from FY16F onwards.