Sarana Meditama Metropolitan, Well-Managed Emerging Hospital Chain In Indonesia
Sarana Meditama is the operator of the well-managed OMNI Hospitals in Indonesia
The third new OMNI hospital in Cikarang (West Java) would commence operation in mid-April this year. OMNI Hospitals has had excellent track record of increasing revenue/inpatient and good annual growth in both total inpatient and outpatient traffic. With the recent asset revaluation in 4Q15, its net gearing would still be manageable as it expands to Cikarang (in 2016) and Balikapapan (in 2017). Maintain BUY and IDR3,300 TP (23% upside).
Excellent track record of increasing revenue/inpatient
As OMNI Hospitals has constantly strived to increase its ability to handle more complicated medical cases (ie minimal invasive coronary surgery and more cancer cases in 2016), OMNI Hospitals’ average revenue/inpatient has been growing by at least c.18% since 2011.
Good annual growth of total patients
OMNI Hospitals has been recording annual growth of 2% and 6% for its total inpatient and outpatient traffic respectively since 2013.
Maintain BUY
We maintain BUY on Sarana Meditama Metropolitan (Sarana Meditama) with the same IDR3,300 TP (23% upside), as its existing OMNI hospitals in Pulomas and Alam Sutera are well-managed and we believe in its management’s expertise in running its new hospital in Cikarang. Our TP is based on DCV valuation with WACC of 9.5% and 3.0% TG.
Healthy balance sheet
The company decided to perform c.IDR500bn asset revaluation in 2015 (c.70% for land and c.30% for building/hospital equipment). With the asset revaluation, we expect its net gearing to reach 0.8x in FY17F (vs 0.6x in FY16F) and decline afterwards. Key risk to our call would be a lower-than-expected bed occupancy rate for the new Cikarang OMNI Hospital, which could drag down FY16F earnings.
Revising our FY16-17 forecasts
We trim our FY16F-17F sales numbers by 5%/0.2% respectively to reflect slower bed capacity expansion in 2016F at the existing OMNI hospitals. We now assume 100 additional beds (vs earlier assumption of 130 additional beds) by end-2016. Yet, our FY16F-17F earnings remain the same as we assume higher gross margins for the existing OMNI hospitals in 2016. Thus, Our DCF-based TP remains unchanged at IDR3,300, which implies 56x/52x 2016F/2017F P/Es, based on 9.5% WACC and 3% TG.
Valuation
We assume a risk-free rate of 8.25%, a market risk premium of 5.0%, an equity beta of 0.25 and a TG rate of 3.0%, which result in an implied WACC of 9.5%. Although the company’s current capital structure is 60% debt and 40% equity, we decided to:
i. Value the company as if the capital structure is 100% equity;
ii. Apply a 40% execution discount in order to be conservative as OMNI Hospitals aims to grow to a total of four hospitals by 2017 (vs two hospitals as at Mar 2016).
