Siloam Hospitals (SILO IJ)

Well positioned in the middle-upper healthcare segment; initiate with Buy rating

We initiate coverage on SILO with a BUY rating and DCF-based TP of IDR 2,200 (implying 10.3x/9.5x of 23F/24F EV/EBITDA). We like SILO for four main reasons: 1) a better growth and profitability outlook for hospital operators following ratification of the omnibus law, 2) SILO’s premium brand equity which makes it a primary choice for Med-Tourism in Indonesia, 3) a sensible revenues-intensity focused strategy to sustain its moat and 4) an attractive 60% discount to regional hospital peers.

Omnibus law ratification offers tailwinds for the healthcare sector. We believe the Omnibus Law Ratification in Jul-23 will translate to a better growth and profitability outlook for the sector. For hospital operators, the simplification in obtaining a doctor’s practice license should create a better payback period for investments in tier-2 and 3 cities. In this context, we expect SILO to attract top foreign-graduates via its premium-segment brand equity, while its stronger presence outside Java will create first-mover advantage.

Revenues intensity-focused in premium markets as the key growth strategy. While SILO has rationalized its hospital additions to only 1-2/year vs. 3-8/year during 2017-2019, its expansion plans will be focused on centers of excellence which we expect to ultimately drive better volume (5-5.6 mn patients by 2024-2025 from 4 mn in 2022) as admissions will be boosted. The centers of excellence shall also serve to maintain the loyalty of premium segment patients despite the preference of domestic consumers for more affordable BPJS services.

Attractive Earnings Growth with Balance Sheet Flexibility. We project EPS growth of 41% to IDR 982 bn in FY23, and 14% growth in FY24, given growing patients volume (at +14%/+8% in FY23/ FY24) from existing hospital networks. For 2025, we forecast 18% EPS growth on the back of additional operating beds in the premium segment from Kemang and Manyar leading to higher inpatient days. The company’s net cash of IDR 881 bn is sufficient to cover hospital openings planned in 2025 at Kemang and Manyar (the IDR 695 bn of capex includes land), based on our estimates.

The attractive valuation implies the market still underappreciates its growth potential. SILO currently trades at 9.0x/8.3x 23F/24F EV/EBITDA (between +1-2SD avg. 5yrs. EV/EBITDA and a 60% discount/premium to its peers). We initiate coverage with a BUY rating with DCF-based TP of IDR 2,200 implying 9.5x FY24 EV/EBITDA. The key risks are weakening domestic consumption on healthcare, competition from overseas players in med-tourism, and lower revenues growth compared to its local peers.