Mitra Keluarga The Best Listed Hospital Operator In Indonesia
We initiate coverage on Mitra Keluarga (MIKA) with a DCF-derived TP of IDR3,150, implying a 67x/60x FY16/17F P/E and a 14% upside return; thus we assign it a BUY recommendation. MIKA is the best-in-class among community hospitals with the highest margins and strongest operating cash flow generation among Indonesian listed hospitals. We believe in its measured expansion plan and acknowledge its strong management team and track record of high specialist retention rate.
Best-in-class community hospital operator. MIKA is a well-established community hospital operator, with a focus on the greater Jakarta and Surabaya regions.
Strong operations reflected by high margins & ROIC as the company’s EBITDA margin of c.34% and ROIC of c.75% are the highest among its Indonesian listed hospital peers. MIKA’s excellent operating cash flow generation covers its capex needs and the company has the capacity to pay higher dividends.
Measured expansion plan as the company aims to add seven hospitals by FY19F. It might also develop new hospitals faster as it has excellent operating cash flow generation and plenty of cash on its balance sheet post its IPO in March this year. Additionally, it plans to add 384 hospital beds for its existing hospitals by FY19F.
MIKA has an excellent doctor retention rate of more than 90% for its doctors (including general practitioners and specialists).
Strong management team lead by a CEO, Mr. Rustiyan Oen, who has been with MIKA for more than 21 years and a vast experience in the healthcare industry.
Initiating coverage with a BUY and a TP of IDR3,150 (a 14% upside). Our DCF-based TP is derived using a WACC of 10.3% and TG of 5% implying a 67x/60x FY16/FY17F P/E. We developed our scenario analysis conclusion in Figure 63.
Key Risks. Limited supply of specialists and delays in delivering new hospitals as scheduled. For a more detailed discussion on risks see page 31.
Investment Thesis
Best-in-class community hospital operator
MIKA, an affiliate of Kalbe Farma (KLBF IJ, Not Rated) is a strong and well established community hospital operator with focus in the greater Jakarta and Surabaya regions. It currently has a total of 12 hospitals, with eight in Jakarta, three in Surabaya and one in Tegal, Central Java. Like that of the OMNI Hospitals (SAME IJ, BUY, TP: IDR3,300), MIKA’s business model is to own the land and buildings. With the exception of the Kemayoran hospital, MIKA owns its 11 hospitals.
Strong operations reflected by high margins & ROIC
MIKA’s both EBITDA margin of c.34% and ROIC of c.75% are the highest among its Indonesian-listed hospital peers. MIKA’s excellent operating cash flow generation capability covers its capex needs and the company has the capacity to pay even higher dividends. Its continuous upgrades of medical equipments and ability to perform more complex medical cases resulted in increasing revenue per patient and shorter average length of stay.
Measured expansion plan
MIKA aims to add seven more hospitals by FY19F. It might also develop new hospitals faster as it has an excellent operating cash flow generation capability and plenty of cash on its balance sheet, post its IPO back in March. Additionally, it plans to add 384 hospital beds for its existing hospitals by FY19F. For its new hospitals, it carefully selects the new locations in densely populated residential areas or industrial towns in the greater Jakarta and Surabaya areas.
High specialist retention rate
MIKA has an excellent doctor retention rate of more than 90% for its doctors (including general practitioners and specialists). Also a substantial majority of its general practitioners who leave for further studies return after the completion of studies. MIKA retains medical professionals via its training programs, workshops and scholarships.
Strong management team
The CEO, Mr. Rustiyan Oen, has been with MIKA for more than 21 years, a majority of them spent in the healthcare industry. The Chairman, Mr. Josef Darmawan Angkasa, has been in the pharmaceutical industry, mostly with Kalbe Farma (KLBF IJ, Not Rated) affiliated companies, for more than 23 years.
Initiating coverage with a BUY and a TP of IDR3,150 (a 14% upside). Our DCF-based TP is derived using a WACC rate of 10.3% and a TG of 5% implying a 67x/60x FY16/FY17F P/E. We corroborated our findings with a peers comparison.
Best-In-Class Community Hospital Operator
MIKA is a strong and well established community hospital operator in the greater Jakarta and Surabaya regions. It currently has 12 hospitals in these locations: Jakarta (8 hospitals), Surabaya (3 hospitals), and Tegal, Central Java (1 hospital). Like the business model employed by OMNI Hospitals (SAME IJ, BUY, TP: IDR3,300), MIKA’s business model is to own the land and building. With the exception of the Kemayoran hospital, MIKA owns the other 11 hospitals.
Brief history
Dr. Khouw Lip Swan established the first MIKA hospital in Jatinegara (East Jakarta) in 1989; the hospital was previously a maternity clinic, Suster Leony. The success of the Jatinegara hospital paved the way for the second hospital in West Bekasi (Greater Jakarta) in 1993. MIKA disposed the Jatinegara and Bintaro hospitals in order to strengthen its balance sheet in the early years of its operation. Since 2002, MIKA has opened eight greenfield hospitals and acquired a brownfield hospital in Tegal (Central Java).
The disposed Jatinegara and Bintaro hospitals are now run by Ramsay Darby Health Care Sdn Bhd, a joint venture between the Ramsay Australia Healthcare and Malaysia’s Sime Darby Berhad. Those two hospitals are now named RS Premier Jakarta and RS Premier Bintaro.
Individual hospital contribution. In FY14, the Kelapa Gading (North Jakarta) hospital contributed the most at IDR 337 bn (ie 17.2%) from the total FY14 revenues. However, in terms of operating profit, the Bekasi Barat hospital had the largest EBIT contribution at IDR 107 bn (ie 18.3%) from the total FY14 EBIT.
Patient base. Historically, the largest contributor group to MIKA’s revenue came from out-of-pocket expense (OPE) patients which represented 63.8% and 60.7% of total patient volume in FY13 and FY14, respectively. The corporate sponsored and insurance covered patients represented 39.3% and 36.2% of total number of patients in FY13 and FY14, respectively. However, these corporate and insurance patients contributed 50.5% and 48.2% of total revenues in FY13 and FY14, respectively
More complex services and streamlined processes
MIKA plans to expand its range of hospital services and offers more complex services, such as angioplasty, orthopedics, endoscopy, and laparoscopy. This strategy should drive revenue intensity. Simultaneously, MIKA has continuously pushed for more streamlined processes, which was reflected in the average length of stay (ALOS) of 3.6 days in FY14 (compared to the national average of 4.4 days).
Strong Operations Reflected By High Margins & ROIC
MIKA has implemented standardized procurement procedures for drugs, hospital supplies and medical equipment in all its hospitals. MIKA only build hospitals in densely/established residential areas, which enable its new hospitals to ramp-up fast and net income breakeven within one year of commencing operation. As a result, MIKA’s both EBITDA margin at c.34% (Figure 41) and ROIC at c.75% are the highest among its Indonesian listed hospital peers.
Indonesian listed hospital landscape
MIKA is positioned in the high margin Zone C (Figure 43). Due to the high cash balance MIKA’s asset turnover ratio was lower in FY13 and FY14. MIKA’s excellent operating cash flow generation capability though covers its capex needs and the company also has the capacity to pay higher dividends.
Excellent cost management
The standardized procurement processes allow MIKA to limit the number of products and provide greater bargaining power with its suppliers, resulting in more favorable pricing and better terms. The procurement cost (as % of total sales) of medicine and medical equipment has been declining from 36.4% in FY12 to 30.8% in FY15F.
Individual hospital performance
All MIKA’s hospitals are profitable and have high bed occupancy rate (BOR). Its average BOR was 63.6% in FY14, higher than the estimated national average at 55%-60%. The relatively low bed occupancy rate of the Tegal (Central Java) hospital, as shown in Figure 45 below, is a result of MIKA not being able to find full-time skilled doctors, as doctors in Tegal area still prefer to practice in their own clinics. Thus, going forward, MIKA only plans to expand in the greater Jakarta and Surabaya region.
Measured Expansion Plan
Expansion of new hospitals. MIKA aims to add seven hospitals by FY19F. For its expansion plan, it carefully selects the new hospital locations in densely populated/established residential areas or industrial towns in the greater Jakarta and Surabaya areas. We forecast the hospital bed ramp-up schedule for the new MIKA hospitals as shown in Figure 47. MIKA might also develop new hospitals faster as it has excellent operating cash flow generation and plenty of cash on its balance sheet post the IPO.
Excellent track record of ramp-up in new hospitals. As MIKA prefers hospital locations where the residential community is already established, the company’s track record of ramping-up new hospitals is excellent.
Bed expansion for existing hospitals. MIKA has the flexibility to expand capacity at its existing hospitals by adding new floors and changing the configuration of the hospital rooms; it plans to add 384 hospital beds by FY19F.
Forecasts for total inpatient volume and bed occupancy rate. With the forecast hospital beds for new hospitals (Figure 47) and for existing hospitals, we project total inpatient volume and bed occupancy rate as in Figure 51 and 52 below.
High Specialist Retention Rate
MIKA has an excellent high doctor retention rate of more than 90% for its doctors (including general practitioners and specialists) as a substantial majority of its general practitioners who leave for further studies return after the completion of their studies. MIKA retains medical professionals via its training programs, workshops, and scholarships to pursue higher education. As such, it strives to increase the number of its permanent doctors by some of the above means.
Jaminan Kesehatan National (JKN)
Universal healthcare
In FY14, the Indonesian Government launched its universal healthcare program, called Jaminan Kesehatan Nasional (JKN), which is administered by the National Social Security Agency (BPJS). The program has comprehensive benefits, from influenza to critical medical intervention such as cancer therapies and open-heart surgeries.
The goal of JKN is to provide 100% health insurance coverage for all the 258 million Indonesians by Jan 2019. In the near term, we expect JKN might have adverse effects on some private hospitals as patients, especially in the low-end segment, prefer to use the JKN scheme rather than going to private hospitals.
Short-term effects of JKN
In FY14, MIKA witnessed a decline in its outpatient and inpatient numbers in the relatively lower-income regions (such as East and West Bekasi regions) due to patients taking advantage of JKN. We believe this negative trend may reverse once patients see that public hospitals are becoming overcrowded as it will take a longer time for the government to build more public hospitals. We have seen stabilizing inpatient volume in 1H15 from MIKA.
Participation in BPJS’ Coordination of Benefit (COB) scheme
In administering the JKN program, BPJS has a COB scheme with private insurers such that BPJS is to pay its rates and private insurance companies will pay the reminder of the services provided by private hospitals participating in the COB scheme. Three MIKA hospitals (Bekasi Timur, Kemayoran, and Depok) will participate in the BPJS’ COB scheme starting in FY16F.
Excellent Free Cash Flow and Strong Balance Sheet
Standardized procurement
Drugs accounted for most of the inventory, representing 67% and 69% of inventory in FY14 and 1H15, respectively. Inventory days fell from 15 days in FY13 to 13 days in FY14 as MIKA managed to improve efficiency in drug procurement during the year through standardized procurement, which has allowed MIKA to limit the number of products and provide greater bargaining power with its suppliers, resulting in more favorable pricing and better terms.
Strong operating cash flow generation
MIKA is able to finance all its capex from its internal operating cash flow generation. As such, its free cash flow will still be positive although MIKA is expected to open two new hospitals every year in the FY17-FY19F time frame. There is also the likelihood that MIKA will increase its dividend payout ratio to more than 55% in the coming years.
Valuation
We assume a risk free rate of 8.25%, a market risk premium of 5.0%, an equity beta of 0.4, and a terminal growth (TG) rate of 5.0%, which results in a WACC of 10.3%. We believe DCF is the most appropriate valuation methodology since MIKA operates in a very defensive hospital industry with stable recurring income.
Scenario Analysis
For our scenario analysis, we project different consolidated bed occupancy rates (BOR) from FY16F onwards as MIKA aims to open new 1-2 hospitals until FY19F (Figure 47) and add more beds to existing hospitals (Figure 50). Our different BOR scenarios are shown as in Figure 62 below.
Key Risks
Higher capex due to weakening IDR against USD. As MIKA relies heavily on imported medical equipment, a weak IDR against the USD could result in higher capex.
Lease risk for the Kemayoran hospital
The land for the Kemayoran hospital is on a lease basis, which will expire on Jul 2018 and there is a risk that it might not be renewed. The Kemayoran hospital contributed 12.3% and 9.6% of MIKA’s total revenues and operating profit, respectively, in FY14.
Competition for skilled specialists
As new hospitals outgrow the supply of specialists every year, there is an increased competition to attract and retain skilled specialists.
Lack of hospital zoning regulation
New hospitals can possibly be erected next to existing hospitals as the Indonesian Government does not currently enforce any hospital zoning regulation.
Operational license
Delays in obtaining operational permits might adversely affect projected revenue and earnings growth.
Slower than expected ramp-up rate for new hospitals
A slower than expected ramp-up trajectory could jeopardize expansion profitability and be a serious risk to the target price.
Competition from foreign hospital operators
If the Indonesian Government allows foreign doctors to practice in Indonesia, we foresee more foreign hospital operators entering and competing in the fast growing Indonesian private hospital market.
