Mitra Keluarga Company Focus

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1 October 13, 2015 Mitra Keluarga Company Focus Patricia Gabriela Titan in medical industry Initiate coverage on MIKA with BUY We initiate our coverage on MIKA with a Buy on the back of: 1) Best profitability among listed hospital (38% 2016F ROE) that we expect to rise further, 2) Good GCG with strong dividend commitment (expect > 90% dividend payout ratio in foreseeable future), and 3) Upside on patient volumes if CoB program rolls out faster than expected. MIKA also offers attractive 3.6% FCF yield for 2016F, better than other big caps with defensive qualities i.e. UNVR (2.4%) and HMSP (2.9%). Concentrating in Jakarta and Surabaya MIKA concentrates on Jakarta and Surabaya, which together combined for ~25% of Indonesia s GDP despite only 19% of population, implying high concentration of highincome earners. We expect MIKA to be able to grow its revenue per inpatient days by 11% per annum, which is the most important earnings growth driver. Upside in patient volume if CoB program is successful MIKA s patient volume posted 7% CAGR for both inpatient and outpatient. We are conservative in assuming only 1% CAGR in due to BPJS cannibalization, but the new CoB (Coordination of Benefit) program in 3 of its hospitals should help in longterm. CoB is a new program that combines private insurance and BPJS schemes. Benefiting from owned land Owning its own land help in several ways: 1) Higher operating margin (rental fee can be 13% plus possible profit sharing), 2) Lower risk of higher rental cost when time comes to renew rental agreement (either due to rising property price or hospital being a success), and 3) More flexibility in making changes to current building structure (or brownfield expansion). Valuation: BUY with TP of Rp 31,500 We recommend MIKA at Rp 31,500 using DCF method (WACC of 13%, LTG of 5%). Our TP implies F EV/EBITDA of 50.6x and 42.7x, and FCF yield of 2.56x and 3.01x respectively. MIKA will do a 1:10 stock split effective this Friday. Companies Data Year end Dec Sales (Rp bn) 1,742 1,946 2,156 2,441 2,766 EBITDA (Rp bn) ,063 Net Profit (Rp bn) EPS (Rp) EPS Growth (%) 38% 30% 6% 15% 15% DPS (Rp) BVPS (Rp) 1,255 1,307 1,172 1,217 1,296 EV/EBITDA (x) P/E (x) Div Yield (%) PT Mitra Keluarga Karyasehat Tbk is one of the largest private hospital groups in Indonesia with 25 years of brand heritage. Buy Rp 31,500 Company Update Share Price Rp 28,200 Sector Healthcare Price Target Rp 31,500 (+12%) Stock Data Reuters Code MIKA.JK Bloomberg Code MIKA.IJ Issued Shares 1,455 Mkt Cap. (Rpbn) 41,033 Avg. Value Daily 6 Month (Rpbn) Wk range / Major Shareholders Lion Investment Partners B.V., 49.7% Belanda PT Griyainsani Cakrasadaya 32.3% Public 18% Consensus Core EPS 16F 17F Consensus (Rp) TRIM vs Cons. (%) Stock Price 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Avg. 5 Day MA Trading Value (RHS) Price (LHS) (Rpbn) 1.2 Mar15 May15 Jul15 Sep PT Trimegah Securities Tbk COMPANY FOCUS 1

2 Largest private hospitals by patient volume In Dec 14, MIKA s number of patient reached 2mn, making it as the largest private hospital in Indonesia in terms of patient volume. The number is higher by 6% compared to peers, albeit MIKA only operated 11 hospitals at that time. We view that MIKA s patient volume will be slightly declined as slow down still persists since 2H14. However, the new CoB program issued by Government in 3 of its hospitals (Kemayoran, Depok, and Bekasi) could act as a remedy for its loss due to BPJS program; though the effect is still more of a long term. Need to remind that MIKA does not accept patient from BPJS in its hospitals. We expect CoB program to help boost MIKA s traffic in 2016F, but in a moderate rate considering MIKA s slow expansion. Furthermore, we still wait for the actual CoB scheme proposed by private insurance. As of now, there are only 8 private insurances participating. Figure 1. MIKA s number of patients Inpatient days Outpatient visits 2,000,000 1,500,000 1,000, ,000 1,089,617 1,225,821 1,314,163 1,476,149 1,571,744 1,620,447 1,661,977 1,597,4401,629, , , , , , , , , , MIKA s high number in patient volume is supported with its number of operating beds, efficiency per doctor, and low ALoS (average length of stay) which then boost its revenue intensity. MIKA s number of operating beds reached 1,726 as of 1H15 (+5% QoQ) and expected to reach 2,000 in 2018F through brownfield expansion. By brownfield expansion, it means through conversion of existing floor, additional floor, and change of room configuration. Figure 2. MIKA s operational beds 2,000 1,500 1,484 1,489 1,484 1,647 1,700 1,751 1,804 1, PT Trimegah Securities Tbk COMPANY FOCUS 2

3 Figure 3. Inpatient days per doctor MIKA Hospital A Hospital B Figure 4. Outpatient visits per doctor 1,800 1,600 1,400 1,200 1, ,638 1, MIKA Hospital A Hospital B Figure 5. Average length of stays MIKA SILO National average PT Trimegah Securities Tbk COMPANY FOCUS 3

4 Proven profitability line track MIKA s top line and bottom line has grew strong in the past years with CAGR of 15% and 26% respectively. MIKA opened its hospitals in Greater Jakarta and Surabaya areas, thus ensuring its high occupancy rate in a short time. MIKA s occupancy rate is ~65%, compared to its closest peer at ~58%. On top of that, MIKA s new hospitals can achieve positive EBITDA within 6 months of commencing; net income breakeven within 1 year thanks to its strategic geographical areas. MIKA also tries to provide more complex and high ticket services to improve its top line, e.g. through surgery and specialists center. MIKA persistently books margin growth on the back of its standardized procurement. MIKA currently limits its drugs and medical supplier into 45, in order to achieve economies of scale. As of now, around 80% of its procurement is already standardized. To further support its standardized procurement, MIKA applies, especially in new hospitals, tablets for doctor to write their prescription; aside to record patients data electronically. The e prescription will then accessed by the pharmacies in hospital who will fill the prescription manually for patient. This way, management can better identify what medicine is used for certain diseases. Figure 6. MIKA s revenue 2, , , Inpatient Outpatient 1, , , , , Figure 7. MIKA s net income 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Net profit Net margin (%) 26.6% 26.8% 27.1% 27.5% 22.9% 18.6% 19.6% PT Trimegah Securities Tbk COMPANY FOCUS 4

5 Owning most of its own land presents lower risk to future cash flow MIKA owns land at 11 of its 12 existing hospitals (only land of its Kemayoran hospital is rented) and management s strategy of owning its own land when possible is likely to continue, as MIKA has already acquired land necessary to build 4 out of its 6 greenfield hospitals. Owning its own land help in several ways: 1) Higher operating margin (rental fee can be 13% plus possible profit sharing), 2) Lower risk of higher rental cost when time comes to renew rental agreement (either due to rising property price or hospital being a success), and 3) More flexibility in making changes to current building structure (or brownfield expansion). Note that MIKA s hospital in Kemayoran should face little or no problem in renewing contract (currently in progress) with management guiding similar fees. There was an issue of local government planning to build an athlete dormitory in the area but according to management, this is no longer an issue as hospital is categorized as public services and therefore unaffected by the development. According to company, the market value of all land it currently owns is Rp1.8tr, which is 4% of MIKA s market cap. Figure 8. MIKA s ROIC 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 59.3% 62.1% 62.4% 64.0% 55.6% 58.2% 47.6% Figure 9. Value of land portfolio 2,000 1,815 1,500 1, Book value (Sep'14) Mark to market value PT Trimegah Securities Tbk COMPANY FOCUS 5

6 Financials Figure 10. Income statement Income estimate (Rp bn) Total patient volume: 1,964,152 2,002,575 1,977,940 2,017,498 2,058,349 Inpatient days 392, , , , ,373 Outpatient visits 1,571,744 1,620,447 1,597,440 1,629,389 1,661,977 Revenue (in mn Rp): Per inpatient days Per outpatient visits Net sales: 1,742 1,946 2,156 2,441 2,766 Inpatient 1,173 1,281 1,422 1,610 1,825 Outpatient COGS: (1,005) (1,081) (1,174) (1,307) (1,451) Drugs and medical supplies (577) (631) (665) (736) (828) Salary and employee benefits (188) (220) (253) (283) (311) Medical support services (86) (75) (82) (93) (94) Inpatient rooms (59) (60) (62) (67) (73) Depreciation of fixed assets (46) (45) (60) (71) (86) Outpatient (39) (38) (36) (36) (36) Repairs and maintenance (9) (13) (18) (21) (23) Gross profit ,134 1,315 EBIT EBITDA ,063 Net profit PT Trimegah Securities Tbk COMPANY FOCUS 6

7 We estimate MIKA to deliver net profit CAGR F of 11%, on the back of 10% CAGR revenue growth. We have taken into account BPJS effect towards MIKA s patient volume. Nevertheless, MIKA still has ample rooms to increase its revenue per inpatient and outpatient. We forecast MIKA s revenue per inpatient and outpatient to grow CAGR F of 8% (vs CAGR of 79%). Figure 11. Margin outlook (%) Gross profit 42.3% 44.4% 45.5% 46.5% 47.6% Operating profit 27.0% 28.0% 29.6% 31.2% 32.8% EBITDA 32.1% 34.2% 34.8% 36.6% 38.4% Pretax profit 30.4% 34.3% 34.5% 34.7% 35.1% Net profit 22.9% 26.6% 26.8% 27.1% 27.5% MIKA offers a better profitability compared to competitors thanks to its efficiency strategy. MIKA has a demanddriven expansion strategy which ensures its fast occupancy rate, hence efficiency can be achieved in a short time. It also has standardized facility design, operating processes, and branding which allows efficient rollout at a lower cost compared to competitors. We expect MIKA to further expand its margin as the result of standardized procurement in more hospitals. A slower growth of EBITDA in 2015F, if you do notice, is the result of extraordinary gain in FY14. Figure 12. Balance sheet Rp bn Cash 1, Receivables Inventories Fixed assets ,207 1,529 Others Total assets 2,134 2,157 2,061 2,135 2,258 Loan 50 Payables Others Total liability Total equity 1,735 1,806 1,705 1,771 1,885 PT Trimegah Securities Tbk COMPANY FOCUS 7

8 MIKA has a healthy balance sheet and free from debt, unlike its competitor. Along with a strong cash flow, company plans to increase its dividend payout ratio for 2015F. Figure 13. MIKA s FCF 1,600 1,400 1,200 1, ,379 1, Figure 14. MIKA s dividend payout ratio 100% 80% 60% 40% 91% 92% 90% 85% 20% 0% 4% PT Trimegah Securities Tbk COMPANY FOCUS 8

9 Valuation We initiate MIKA with BUY rating at target price of Rp 31,500, +12% upside from current price. We are optimist with MIKA as the company has high profitability line and the sector is still underpenetrated. Albeit the valuation is a bit too much, but MIKA offers a high ROIC of ~64% in 2016F, compared with SILO at 12% and RFMD at 13%. We value MIKA using DCF methodology, with WACC of 13%. Our TP implies F EV/EBITDA of 50.6x and 42.7x, and FCF yield of 2.56% and 3.01%. MIKA s historical forward FCF yield is 3.5%, higher than HMSP at 2.9% and UNVR at 2.4%. Figure 15. DCF calculations 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F EBIT ,084 1,260 1,472 1,740 2,051 2,411 2,827 3,309 EBIT (1T) ,009 1,180 1,394 1,643 1,931 2,265 2,651 Depreciation Net working capital Capex (357) (457) (562) (541) (355) (390) (429) (472) (519) (571) FCFF (Rp bn) 1,174 1,379 1,601 1,986 2,597 3,093 3,669 4,337 5,110 6,005 Discounted FCFF 1,174 1,225 1,264 1,392 1,618 1,711 1,803 1,893 1,982 2,069 Terminal value 83,311 PV of terminal value 28,705 Total company value 44,837 Net debt (663) NAV 45,500 NAV / share 31,270 PT Trimegah Securities Tbk COMPANY FOCUS 9

10 Income Statement (Rpbn) Balance Sheet (Rpbn) Year end Dec Year end Dec Revenue 1,742 1,946 2,156 2,441 2,766 Revenue Growth 18.1% 11.7% 10.8% 13.2% 13.3% Gross Profit ,134 1,315 Opr. Profit EBITDA ,063 EBITDA Growth (%) 19.2% 12.5% 19.1% 19.0% Net Int Inc/(Exp) Gain/(loss) Forex Other Inc/(Exp) Pretax Profit Tax (118) (133) (148) (169) (193) Minority Int Extra. Items Reported Net Profit Core Net Profit Growth (%) 37.9% 29.7% 11.8% 14.6% 14.8% Dividend per share growth (%) % 7.5% 12.1% 8.4% Dividend payout 4% 91% 92% 90% 85% Cash and equivalents 1, Other curr asset Net fixed asset ,207 1,529 Other asset Total asset 2,134 2,157 2,061 2,135 2,258 ST debt 50 Other curr liab LT debt Other LT Liab Minority interest (84) (84) (84) Total Liabilities Shareholders Equity 1,735 1,806 1,705 1,771 1,885 Net debt / (cash) (1,058) (970) (857) (663) (438) Total cap employed 1,853 1,951 1,850 1,916 2,030 Net Working capital 1, Debt 50 Cash Flow (Rpbn) Key Ratio Analysis Year end Dec Year end Dec Net Profit Depr / Amort Chg in Working Cap 63 (49) 31 (15) (17) Others 21 4 CF's from oprs Capex (147) (169) (284) (357) (457) Others (76) 9 CF's from investing (223) (160) (284) (357) (457) Dividend (15) (470) (532) (596) (646) Others 1 (56) CF's from financing (14) (526) (532) (596) (646) Net cash flow 301 (138) (113) (194) (225) Cash at BoY 802 1, Cash at EoY 1, Free Cashflow ,174 1,379 Profitability Gross Margin (%) 42.3% 44.4% 45.5% 46.5% 47.6% Opr Margin (%) 27.0% 28.0% 29.6% 31.2% 32.8% EBITDA Margin (%) 32.1% 34.2% 34.8% 36.6% 38.4% Core Net Margin (%) 22.9% 26.6% 26.8% 27.1% 27.5% ROAE (%) 26.0% 29.2% 32.9% 38.1% 41.6% ROAA (%) 20.9% 24.1% 27.4% 31.6% 34.6% Stability Current ratio (x) Net Debt to Equity (x) (0.6) (0.5) (0.5) (0.4) (0.2) Net Debt to EBITDA (x) (1.9) (1.5) (1.1) (0.8) (0.4) Interest Coverage (x) Efficiency A/P (days) A/R (days) Inventory (days) Interim Result (Rpbn) 2Q14 3Q14 4Q14 1Q15 2Q15 Capital History Date Sales Gross Profit EBITDA Opr. Profit Net profit Core profit Gross Margins (%) 43.7% 45.7% 46.0% EBITDA Margins (%) 32.7% 35.2% 34.9% Opr Margins (%) 26.2% 30.6% 30.0% Net Margins (%) 25.5% 27.9% 30.4% Core Margins (%) 26.8% 29.4% 24Mar15 IPO@Rp17,000 PT Trimegah Securities Tbk COMPANY FOCUS 10

11 PT Trimegah Securities Tbk Gedung Artha Graha 18 th Floor Jl. Jend. Sudirman Kav Jakarta 12190, Indonesia t f DISCLAIMER This report has been prepared by PT Trimegah Securities Tbk on behalf of itself and its affiliated companies and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Securities. While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication, Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of clients of Trimegah Securities who are expected to make their own investment decisions without reliance on this report. Neither Trimegah Securities nor any officer or employee of Trimegah Securities accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Trimegah Securities and/or persons connected with it may have acted upon or used the information herein contained, or the research or analysis on which it is based, before publication. Trimegah Securities may in future participate in an offering of the company s equity securities.