Siloam International Hospitals (SILO IJ)

Better entry point emerges post-weak 3Q24 results

• SILO increased its revenue intensity by 4% qoq in 3Q24, amid weak 9M24 growth (from high base) and lingering insurance repricing issues.
• Incorporating 9M24 results and risks of weaker admissions in 4Q24 due to year-end holiday, we trimmed our FY24F-26F Net Profit by 22%-28%.
• We maintain our Buy rating with a slightly higher DCF-based TP at Rp3,300; we believe current valuation has priced-in weak 3Q24 results.

Weak 9M24 Results from a High-Base and Issues with Private Insurance

SILO’s weaker-than-expected 9M24 net profit (-26% yoy, 56%/53% of our/cons. FY24F) has been primarily driven by weak 3Q24 results (vs. 3Q23's higher bases from rising pneumonia cases) and lingering repricing issues within the private insurance market. While 3Q24 saw modest inpatient volume growth (-4% qoq; -1% yoy; vs. MIKA’s -12% qoq/-8% yoy and HEAL’s -3% qoq; +9% yoy), inpatient revenue intensity still grew by 4% qoq/-2% yoy in 3Q24 (vs. MIKA’s +5% qoq/+11% yoy and HEAL’s +2% qoq; -0% yoy), demonstrating the company’s intact strategy to push complex cases. Mgmt. views its 4Q24 volume outlook with cautious optimism, as it might face lower seasonality due to the year-end holiday. Meanwhile, on issues with private insurance, SILO believes that it has stronger bargaining power due to its extensive network and capability to manage complex cases.

Adjusting Down our FY24F-26F Net Profit by 22%-28%

Incorporating 9M24 achievement and risks of weaker admissions in 4Q24, we trimmed our FY24F-26F net profit by 22%-28%. However, we maintained our ~100-200bps/year LT EBITDA margin expansion assumption, as we believe that its cost-saving strategy should remain on track (exh.2-3). Meanwhile, we slightly lowered our LT average IP/OP revenue intensity growth by -10/-30bps to 2.7%/year, incorporating weaker growth from the priv. insurance segment.

Maintain Buy rating with a slightly higher TP of Rp3,300

We maintain our Buy rating as we believe current valuation (exh.8) has already priced in weak 3Q24 results and overlooked SILO’s strong brand equity and margin expansion potentials over the next 2-3 years from the continuous focus on personnel, cost management, complex treatments. We also see upside potentials from: 1) CVC’s global experience in hospital operation (exh.11), 2) potential buyback of hospital assets from REITS to lower depreciation by 20-50%, creating upside in LT EBIT margin by 6-10% (despite a potentially heightened gearing ratio of up to ~1.0x vs. current 0.1x). We roll forward our DCF valuation and arrive at a slightly higher TP of Rp3,300 (implying 13.6x FY25FEV/EBITDA, still at a 25% disc. to regional peers). Downside risks: 1) cost-control execution, 2) declining volume/intensity.

… Read More 20241112 SILO