Share analysis: Mitra Keluarga Karyasehat – health care

The Company

Mitra Keluarga Karyasehat (MIKA) is the second-largest private multi-speciality hospital group in Indonesia in terms of number of hospital beds (in 2013), according to Frost & Sullivan. The company network consists of 11 hospitals (Bekasi Barat, Bekasi Timur, Cibubur, Cikarang, Depok, Kelapa Gading, Kemayoran, Kenjeran, Surabaya, Tegal and Waru) with total bed capacity of 1953 (as of 2014).

MIKA’s operational focus is for each hospital to provide a comprehensive range of general hospital services for the local community. Each facility provides services to cater to both inpatients and outpatients, including emergency rooms, pharmacies, intensive care units, diagnostics and imaging, and laboratory and surgical services. Multi-speciality treatments for patients of various income levels are also provided in the hospital. The key areas of specialisation offered by the company include angiography, cardiology, neurosurgery, intensive care, coronary care, orthopaedics, gastroenterology and urology.

Except for the facility in Kemayoran, the company owns almost all the land and buildings for its hospitals. It chooses to focus on Greater Jakarta and Surabaya, which are perceived as areas with large, attractive, captive populations and the highest supply of medical graduates in Indonesia. MIKA is known for its best-in-class community-based business model. This can be seen from MIKA’s superiority in all operational and financial metrics, compared to other publicly-listed health care players in Indonesia, as well as to those across the region. As a case study, MIKA’s return on invested capital was 62.1% in 2014, markedly higher than Omni Hospital’s 19.3%, Siloam Hospital’s 7.2% and Mayapada Hospital’s -8.1%.

Development Strategy

The company will open seven greenfield hospitals by 2019, including a facility in Kalideres by 2H 2015, one hospital in 2016 and two in 2017. The company has secured a total land holding of 65,755 sq metres, located in south and east Jakarta, and is dedicated to building four new hospitals in the future. In addition, the company also plans to purchase additional land in south, east and west Jakarta, as well as in Surabaya, intended as potential sites for two additional medical facilities. For these new hospitals, the company targets achievement of a positive EBITDA within 3-6 months after opening and a breakeven point within six months.

We also assume that the total number of operational beds in nine of MIKA’s hospitals (Bekasi Timur, Cibubur, Cikarang, Depok, Kelapa Gading, Kenjeran, Surabaya, Tegal and Waru) will increase from a total of 1647 in 2014 to 1919 by 2016 and 2031 by 2019. This will be done by adding additional floors and/or converting spaces currently used for administrative purposes in the respective hospitals. The company budgets capex of Rp283.5bn ($23.4m) in 2015 and Rp356.6bn ($29.5m) in 2016 – all to be financed by internal cash, given the company’s strong operating cash flow position throughout our forecasted period.

Forecast

Expansion in operational bed numbers, as well as improving revenue per patient from increasingly sophisticated services, will drive revenue growth to 27.2% year-on-year (y-o-y) in 2015. Meanwhile, we see little impact on MIKA’s profitability from surging inflation or Rupiah depreciation. In our model, we expect the FY2015 EBITDA margin to remain stable at 34.0% (vs. 34.3% in 2014).

Bottom line, we expect FY2015 net profit to rise by 21.2% y-o-y. We calculate MIKA’s fair equity value (EV) to be Rp29,675 ($2.45) per share. The counter is now trading at a premium FY2015 EV/EBITDA of 38.6x against a regional average of 27.9x. We believe market participants have taken a blue-sky scenario in valuation – benchmarking the counter with India’s Fortis Healthcare (53.2x) and China’s Aier Eye Hospital Group (55.0x) – considering MIKA’s leading position and its superior profitability in the industry, as well as its affiliation with Kalbe Farma group.

Upside risk to our call is a better than expected EBITDA margin, given the 1Q 2015 achievement of 36.5%.

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