Siloam International, Slower Capacity Ramp-Up for Hospitals Outside Java

We remain NEUTRAL on Siloam with a lower IDR9,500 TP (from IDR13,000, 8% upside), as we note that it is not easy to attract qualified, full-time specialist doctors in a densely-populated area like Medan. This resulted in a low c.30% bed occupancy rate for its Medan hospital in the first eight months of operation. Siloam has also indicated that the average revenue per inpatient in 2015 would slightly decline YoY, which we believe could be due to higher revenue proportion from BPJS (Indonesian universal healthcare programme) patients in 2015.

Low bed occupancy rate for Siloam hospital in Medan, North Sumatera. In Indonesia, the availability of qualified specialist doctors is a crucial key factor for attracting patients. The 350-bed-capacity Siloam hospital started operation in Apr 2015 in Medan, where it was not easy to attract qualified, full-time specialists.

For example, the Medan hospital managed to hire a cardiologist only in Aug 2015. As there are c.50 established hospitals in Medan, competition and slower-than-expected hiring of full-time specialists had resulted in a lower-than-expected bed occupancy rate of c.30% during the Medan hospital’s first eight months of operation.

Three new Siloam hospitals to operate this year. Siloam International Hospitals (Siloam) recently opened a new hospital in Labuan Bajo (East Nusa Tenggara province) on 25 Jan 2016. It plans to open another two Siloam hospitals in Bau Bau (Sulawesi Tenggara province) and Yogyakarta (Central Java province) this year.

Judging from the Siloam hospital in Medan, there is a good likelihood that the Yogyakarta hospital might have a lower-than-expected bed occupancy rate in its first year of operation as, similar to Medan, Yogyakarta has c.30 established hospitals, which could make hiring of qualified specialists difficult for the new hospital.

Cutting FY16F-17F earnings. Siloam revealed that the new Medan hospital and the overall Siloam hospitals’ bed occupancy rates are c.30% and 60% respectively at end-2015. Hence, we cut FY16F-17F earnings by 18-26% to reflect lower forecasts of: i) bed occupancy rate ramp-up in both Siloam’s mature and new hospitals, and ii) lower average revenue per inpatient.

Non-preemptive rights issue overhang. In May 2015, Siloam secured approval for a non-preemptive rights issue of 115.6m shares (ie 9.09% of its enlarged capital). The rights issue can be executed within a 2-year time frame, with the proceeds slated for organic/inorganic expansion of the company’s hospitals.

Remain NEUTRAL with a lower IDR9,500 TP (from IDR13,000), which implies 16.4x/13.3x FY16F/FY17F EV/EBITDA. Our DCF-based TP assumes a WACC of 8.9%, terminal growth of 3%, and beta of 0.3.

Low bed occupancy rate for Siloam hospital in Medan, North Sumatera
In Indonesia, the availability of qualified specialist doctors is a crucial key factor for attracting patients. The 350-bed-capacity Siloam hospital started operation in Apr 2015 in Medan, where it was not easy to attract qualified, full-time specialists. For example, the Medan hospital managed to hire a cardiologist only in Aug 2015.

As there are c.50 established hospitals in Medan, competition and slower-than-expected hiring of full-time specialists had resulted in a lower-than-expected bed occupancy rate of c.30% during the Medan hospital’s first eight months of operation.

Three new Siloam hospitals to operate this year
Siloam recently opened a new hospital in Labuan Bajo (East Nusa Tenggara province) on 25 Jan 2016. It plans to open another two Siloam hospitals in Bau Bau (Sulawesi Tenggara province) and Yogyakarta (Central Java province) this year. Judging from the Siloam hospital in Medan, there is a good likelihood that the Yogyakarta hospital might have a lower-than-expected bed occupancy rate in its first year of operation as, similar to Medan, Yogyakarta has c.30 established hospitals – which could make hiring of qualified specialists difficult for the new hospital.

Cutting FY16F-17F earnings
Siloam revealed that the new Medan hospital and the overall Siloam hospitals’ bed occupancy rates are c.30% and 60% respectively at end-2015. Hence, we cut FY16F-17F earnings by 18-26% to reflect lower forecasts of: i) bed occupancy rate ramp-up in both Siloam’s mature and new hospitals, and ii) lower average revenue per inpatient.

Valuation
We assume a risk-free rate of 8.25%, a market risk premium of 5%, an equity beta of 0.3 and TG rate of 3%, which results in an implied WACC of 8.9%.