Sarana Meditama Primed For Growth
We initiate coverage on Sarana Meditama Metropolitan with a DCF-derived IDR3,300 TP (31% upside) which implies 56x/53x FY16F/17F P/Es and recommend BUY. It is a prominent hospital operator in Greater Jakarta with its two award-winning OMNI Hospitals in Pulomas and Alam Sutera and an expansion strategy in place for two greenfield 250-bed hospitals. It focuses on a complex case mix through its center of excellence strategies, which have resulted in increasing margins.
Prominent hospital operator
Sarana Meditama Metropolitan (Sarana Meditama, SAME or OMNI Hospitals) operates two hospitals at Pulomas and Alam Sutera. In 2013, OMNI Hospitals obtained a 5-star certification from KARS (Indonesian Hospital Accreditation Committee), which is the Indonesian version of JCI (Joint Committee International).
Excellent operations and healthy margins
OMNI Hospitals’ focus on complex case mix has resulted in improving margins since FY10. OMNI hospitals have been able to manage their medicine procurement which enabled OMNI Hospitals to reduce the numbers of drug types and strengthen the relationship with its key five suppliers.
Expansion of two greenfield 250-bed OMNI hospitals
Currently Sarana Meditama is i) constructing a new 250-bed hospital in Cikarang (West Java), which would commence operations in 2016 and ii) planning another 250-bed hospital in Balikpapan (East Kalimantan), to commence operations in 2017.
Experienced management headed by Dr Umapathy Panyala (CEO), who was previously a regional CEO of Apollo Hospitals Group and CEO of Rajiv Gandhi Super Specialty Hospital. The supervisory board is headed by Mr. Budi Hadidjaja (chairman), who has an extensive experience in the banking and industrial sectors.
Initiating coverage with a BUY and IDR3,300 TP
In our DCF we include the expected growth by assuming the existing hospitals would gradually add 110 beds by the end of FY16F and the commencement of the new hospitals in Cikarang by early Aug 2016 and Balikpapan by early Aug 2017. We derive our TP using a WACC of 13.3%, TG of 5% and a conservative 40% execution discount, implying 56x/53x FY16F/FY17F P/Es which we consider justified based on to the impending growth.
Risks. Limited supply of specialists; execution/construction risk for the additional two new OMNI hospitals in Cikarang and Balikpapan
Investment Thesis
Prominent hospital operator. Sarana Meditama was founded in 1972 and is currently one of the leading hospital group operators in Indonesia. It acquired OMNI Hospital Pulomas (East Jakarta) in 1984 and built the OMNI Hospital Alam Sutera (West Java) in 2008. In 2010, Sarana Meditama introduced a team of senior professional managers to work with senior physicians and this has led to the hospitals’ growth and expansion.
In 2013, OMNI hospitals obtained a 5-star certification from KARS (Indonesian Hospital Accreditation Committee), the Indonesian version of JCI (Joint Committee International). OMNI is currently aiming for the JCI accreditation for its Alam Sutera hospital.
Excellent operations and healthy margins
OMNI Hospitals’ ability and focus on a more complex case mix has resulted in improving margins since FY10. Furthermore, OMNI Hospitals have been able to manage its medicine procurement which enables OMNI Hospitals to reduce the numbers of drug types and strengthen the relationship with its key five suppliers. As a result, OMNI won the 2014 Frost & Sullivan Indonesia Emerging Hospital Award.
Expansion of two greenfield 250-bed OMNI Hospitals
The Company is constructing a new 250-bed OMNI Hospital in Cikarang (West Java), which would commence operations in 2016. It is also planning another 250-bed OMNI Hospital in Balikpapan (East Kalimantan), to commence operation in 2017. At present, the construction of the new Cikarang hospital is more than 20% completed and we expect it to begin operations in early Aug 2016. We also expect the Balikpapan Cikarang to start operations sometimes early Aug 2017.
Experienced management
Management is headed by Dr. Umapathy Panyala (CEO), who was previously regional CEO of Apollo Hospitals Group and CEO of Rajiv Gandhi Super Specialty Hospital. The Supervisory Board is headed by Mr. Budi Hadidjaja (Chairman), who has extensive experience in the banking and industrial sectors.
Hedged USD bank loan
Sarana Meditama entered into a USD37m credit facility agreement with QNB Bank and as of 30 Jun, it has drawn USD22.3m from the facility. Both the principal and interest are hedged, thus minimising the USD/IDR exposure risk.
Initiating coverage with a BUY and a TP of IDR3,300
On our DCF valuation (Figure 93) we assume the existing OMNI Hospitals (Pulomas & Cikarang) would add 110 hospital beds gradually by the end of FY16F and the commencement of the new hospitals in Cikarang by early Aug 2016 and Balikpapan by early Aug 2017. Our TP is derived using a WACC of 13.3%, TG of 5% and conservatively a 40% execution discount to the theoretical equity value, implying a 56x/53x FY16/FY17F P/E which we consider justified based on to the impending growth. We corroborate our result with a peers comparison analysis.
Prominent Hospital Operator
Brief history. Sarana Meditama was founded in 1972 as a non-profit medical organisation in Pulomas (East Jakarta) providing psychiatric diagnosis and therapy to the local community. It is currently one of the prominent hospital group operators in Indonesia. It acquired OMNI Hospital Pulomas in 1984 and built OMNI Hospital Alam Sutera (West Java) in 2008.
Accreditation
In 2013, OMNI Hospitals obtained a 5-star certification from KARS (Indonesian Hospital Accreditation Committee), the Indonesian version of JCI (Joint Committee International).
Patient base
OMNI Hospitals derive their revenues from three key patient categories: i) 33% from corporate-sponsored patients, ii) 33% from insurance covered patients, and iii) the rest represents out-of-pocket expense (OPE) patients. The company continues to reach to more corporations throughout Indonesia and maintains excellent relationships with almost all health insurance companies in Indonesia.
It is also engaging more international insurance companies with excellent reputation. For its surrounding communities, OMNI Hospitals apply a more direct approach such as health seminars on the importance of healthy living via preventive, curative, and rehabilitative methods.
Participation in BPJS
In FY14, the Government of Indonesia launched its universal healthcare program, called Jaminan Kesehatan Nasional (JKN), which is administered by the National Social Security Agency (BPJS). The management decided to make OMNI Hospital Alam Sutera a referral hospital for participants in JKN and has become a referred hospitals for hemodialysis program since Jan 2014.
Excellent Operation And Healthy Margins
Healthy margins. In FY10, the company introduced a team of senior professional managers to assist and run OMNI Hospitals profitably and drive for the next growth phase (in Figure 97 we show the management profiles). The management team has done an excellent job in improving the operations of OMNI hospitals which resulted in the company transferring from Zone B to the higher margin Zone C as we show in Figure 75 below.
Along with a seasoned management team, OMNI Hospitals’ ability and focus on more complex case mix resulted in improving margins since FY10. Furthermore, OMNI Hospitals were able to manage its medicine procurement through its well-managed implementation of “formularium”, which enables OMNI hospitals to reduce the numbers of drug types and strengthen relationship with its key five suppliers.
Bed expansion for existing hospitals
The management has been adding more beds for the existing hospitals since FY10. It plans to add 110 new beds for OMNI Hospital in Alam Sutera and 80 new beds for OMNI Hospital in Pulomas. These additional 190 beds will be installed in stages in during each quarter of FY16F.
As their customers acknowledge the excellent tertiary and quaternary care provided by OMNI Hospitals, the company has seen continuing increase in revenue per inpatient, leading to consistent growth in total revenues and better profitability. SWA Magazine ranked OMNI Hospitals on the 2nd-place in its 2015 Indonesian Most Reputable Healthcare Brand for hospitals in the greater Jakarta region.
Expansion Of Two Greenfield 250-Beds OMNI Hospitals
The 3rd OMNI Hospital
Sarana Meditama is constructing a new 250-beds OMNI Hospital in Cikarang (West Java). The ground breaking was done in late April and the management expects the new Cikarang OMNI Hospital to commence operation in Apr 2016. However, to be conservative, we assume it is to start operation in early Aug 2016. This Cikarang OMNI Hospital will have facilities such as a heart center, neuro surgery center, orthopedic center, urology center, minimal invasive surgery center, radiology interventional and trauma center.
The 4th OMNI Hospital
Sarana Meditama is planning a 250-beds OMNI Hospital in Balikpapan (East Kalimantan), which is to commence operation in 2017. As of Sep, Sarana Meditama has paid down payment for the land in Balikpapan.
Bed occupancy rate for the new hospitals
We forecast for each of the new OMNI hospitals to follow an approximate ramp-up operational bed schedule as shown in Figure 84 and 85. For comparison, Mitra Keluarga (MIKA IJ, BUY, TP: IDR3,150), when it opened its hospital in Cikarang in FY11, its bed occupancy rate was 46% and was able to ramp it up to 77% in three years’ time by FY14.
Financial impact of new OMNI hospitals
We forecast the new Cikarang hospital will start operation in early Aug 2016 and the Balikpapan hospital to start in early Aug 2017. Per management, each of the new 250-bed OMNI hospitals will become EBITDA positive in second year of operation; we expect the consolidated operating margins tp decline at the start of each new hospital and forecast the operating margin will revert to normal operating in FY21F.
EBITDA to grow by 23% CAGR for FY15F-FY18F
Incorporating the additional new 110 beds and 80 beds in the existing Alam Sutera and Pulomas OMNI Hospitals, respectively, in 2016 and contributions from the new two OMNI Hospitals (Cikarang in early Aug 2016 and Balikpapan in early Aug 2017), we forecast that OMNI Hospitals’ consolidated EBITDA will approximately double to c.IDR290 bn in FY18F from IDR155 bn in FY15F
Free cash flow (FCF) could turn positive again in FY18F
The expansion of two new OMNI Hospitals in Cikarang and Balikpapan could result in higher total Net Gearing of 1.5x and 1.8x in FY16F and FY17F, respectively. In terms of Gross Debt/Equity, the ratios could reach 1.7x and 2.0x in FY16F and FY17F, respectively, which is lower than the stipulated QNB Bank covenant of 2.3x. We estimate the FCF to become positive again starting with FY18F
Excellent Working Capital Management
OMNI Hospitals have managed the working capital very well. The company has been able to collect its receivable much faster than paying its payable, resulting in a negative cash conversion cycle days.
Valuation
Conservative assumptions. Although the company’s current capital structure is 60% debt and 40% equity, in order to be conservative, we decided to value the company as if the capital structure is 100% equity with a Beta of 1 (higher than the current Beta of 0.48 per Bloomberg to reflect the higher risk). For comparison, the excellent Mitra Keluarga Hospitals (MIKA IJ, BUY, TP: IDR3,150) also has no debt and plans to finance its future hospitals by its internal cash flows (ie 100% equity). In our model, we project the company to be debt free by FY21F as we estimate it has the ability to do so.
On our DCF valuation we assume the existing hospitals (Pulomas & Cikarang) would add 110 beds gradually by the end of FY16F and the commencement of the new hospitals in Cikarang by early Aug 2016 and Balikpapan by early Aug 2017. Our TP is derived using the assumptions derived in Figure 92, implying a 56x/53x FY16/FY17F P/E which we consider justified based on to the impending growth.
To further account for the execution/construction risk on the additional two new hospitals in Cikarang and Balikpapan we further apply a valuation judgment; based on our calculation, the new Cikarang and Balikpapan OMNI Hospitals would each contribute c.20% to the share price based on a DCF valuation. Thus, to further for this risk, we conservatively apply a total 40% execution discount to the equity value derived from the DCF valuation including all the four OMNI Hospitals as shown below.
Scenario Analysis
Base Case Scenario: Our DCF Valuation on Figure 93 assumes: a) Existing OMNI Hospitals (Pulomas & Cikarang) would add 110 hospital beds gradually by end of FY16F and b) commencement of the new OMNI Hospitals in Cikarang (by early Aug 2016) and Balikpapan (by early Aug 2017).
Worst Case Scenario: In a worst case scenario, we assume both the cancelation of the additional 110 beds, and the construction of the two new hospitals.
Under this worst case scenario, the consolidated FY16/17F EPS would be IDR19.0 and IDR41.9, respectively. These worst case EPS numbers are lower than the base case scenario EPS number because the new Cikarang OMNI hospital would only turn EBITDA positive in 3rd-year of operation in FY18F. Thus, the higher operating costs and interest expense in running the new Cikarang OMNI Hospital would drag down the profitability of the existing OMNI Hospitals in Pulomas and Alam Sutera.
Best Case Scenario: In best case scenario, we assume: a) Existing OMNI Hospitals (Pulomas & Cikarang) would add 110 hospital beds gradually by end of FY16F, b) successful commencement of the new OMNI Hospitals in Cikarang (by early Aug 2016) and Balikpapan (by early Aug 2017), and c) both the new hospitals manage to operate 125 beds in 1st-year of operation and 250 beds in 2nd-year of operation. Also, the new hospital construction goes smoothly such that we don’t need to account for any contingencies, and hence, no need to account for execution risk/premium.
Under this best case scenario, the consolidated FY16/17F EPS would be IDR63.2 and IDR113.0, respectively.
Key Risks
Higher capex due to weakening IDR against USD. As Sarana Meditama relies heavily on imported medical equipment, weak IDR against USD may result in higher capex.
Competition for skilled specialists. As new hospitals outgrow the supply of specialists every year, there is increased competition to attract and retain skilled specialists.
Lack of hospital zoning regulation. New hospitals can possibly be erected next to existing hospital as the Indonesian Government does not really enforce hospital zoning regulation.
Operational license. Delays in obtaining an operational permit issuance might adversely affect projected revenue and earnings growth.
Slower than expected ramp-up rate for new hospitals. 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 to enter and compete in the fast growing Indonesian private hospital market.
