Saudi Arabia Healthcare: Safe bet with limited upsidemec.biz/term/uploads/WFVOC_4007-31-05-2016.pdf3 years, Al Hammadi has already started commercial operations of Al-Suweidi Hospital

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© SICO 2016 All Rights Reserved

Attention is drawn to the disclaimer and other information in the end

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Saudi Arabia Healthcare: Safe bet with limited

upside

Saudi Arabia healthcare sector has strong fundamentals and a good track

record but stretched valuations

We downgrade the sector to “Neutral” from “Positive” following the

recent outperformance. Within the sector, we continue to like Dallah (TP

SAR 100/sh, Buy) and Mouwasat (TP SAR 150/sh, Buy)

We initiate on Middle East Healthcare with a TP of SAR 75 and “Neutral”

rating; maintain “Buy” on Dallah and Mouwasat; downgrade Al Hammadi

and Care to “Sell” from “Buy” rating

Strong fundamentals are already priced in

Saudi healthcare names have recovered sharply from January lows,

outperforming the broader Tadawul index by a considerable margin. Dallah

recovered (+65%), Care (+41.7%), Hammadi (+27.9%) and Mouwasat

(+36.3%), from January lows outperforming the Tadawul index which has

increased 18.1%. While we like the sector’s strong fundamentals, valuations

look stretched and stocks offer limited upside. Accordingly, we downgrade the

sector to “Neutral” from “Positive”.

Our top pick is Dallah (TP SAR 100/sh, Buy)

Dallah’s revenue grew 19% YoY in 1Q16, higher than 12%/8%/13%/9% in the

past four quarters. We see robust revenue growth and stronger margins

ahead, and accordingly revise up our 2016/17/18 net income estimates by

3%/2%1% respectively, and increase our target price to SAR 100/sh from SAR

85/sh. The company’s total capacity is expected to reach 1,003 beds/642 clinics

by 2018 from 448 beds/163 clinics, translating into a net income growth CAGR

of c.20% during the 2015-20 period. Dallah has no plans to add any capacity

in 2016, and higher patient volume plus increasing utilisation of existing assets

would account for the bulk of 2016E earnings growth. Beyond 2016, Dallah’s

equity story would depend on the success of the greenfield Namar Hospital

(initial 300 beds with c.70% capacity addition) that is set to start in 2018.

We also like Mouwasat (TP SAR 150/sh, Buy) but the stock offers limited upside

Mouwasat’s revenue grew 21% YoY in 1Q16, led by higher contribution from

Riyadh Hospital, stronger than 4%/12%/7%/12% revenue growth witnessed

over the past four quarters, respectively. We see higher revenue growth and

stronger margins post strong 1Q, and accordingly revise up our 2016/17/18 net

income estimates by 1%/2%3% respectively, and increase our target price to

SAR150/sh from SAR 140/sh. We maintain the stock at “Buy” rating

Initiate on Middle East Healthcare (TP SAR 75/sh, Neutral)

We initiate on Middle East Healthcare (MEH) with a “Neutral” rating and

target price of SAR 75/sh. MEH trades at a 15.9x EPS (2016e) and offers 7.4%

CAGR (2015-20) EPS growth. Unlike its peers, the company does not have any

aggressive growth plans. It is planning to add 150 beds/35 clinics in 2Q16 at

Hail (33% stake) and 150 beds/100 clinics in 1Q18 at Dammam, taking its total

capacity from 788 beds/281 clinics to 986 beds/392 clinics in 2018. Beyond this

MEH has not announced any further bed capacity addition in the medium-

term, unlike its peers - Dallah, Mouwasat and Al Hammadi. The six-year CAGR

(2014-20) bed capacity growth for Middle East Healthcare is only 3.8%, much

lower than 14.4%/15.8%/28.1% for Dallah, Mouwasat and Hammadi,

respectively. Accordingly, earnings growth potential for the company is

weaker relative to its peers over the longer-term.

Nitin Garg, CFA +973 1751 5000 ext 5059

[email protected]

www.sicobahrain.com

SICO RESEARCH Healthcare

2

Contents

Saudi Arabia Healthcare: Safe bet with limited upside ...................................... 1

Performance since sector initiation………………………………………………… 2

1Q16 result summary: Strong performance overall………………………………2

Valuations……………………………………………………………………………….6

Middle East Healthcare (initiation) : Lacking growth drivers ............................. 9

Al Hammadi Company for Development and Investment: Facing margin

pressure ............................................................................................................... 18

Dallah Healthcare: Top pick ............................................................................... 20

Mouwasat: Buy with modest upside ................................................................. 22

National Medical Care Co. .................................................................................. 24


3

Performance since sector initiation

We initiated on the Saudi Healthcare sector on 13 October 2015 titled KSA

Healthcare - Prescription for long term growth and healthy returns with a

positive sector rating, and Mouwasat as our top sector pick. Since our

initiation, Mouwasat has delivered a 5.3% return, outperforming the broader

Tadawul index by 22.4%, and the stock has also been a better performer than

its peers.

Exhibit 1: Performance since recommendation

Recommendation

during initiationreturn

Performace

w.r.t.

Tadawul

Current

recommendation

Mouwasat Initiated at "Buy" rating 5.3% 22.4% Buy

Care Initiated at "Add" rating 0.0% 17.5% Sell

Dallah Initiated at "Add" rating -7.1% 10.0% Buy

Al Hammadi Initiated at "Add" rating -23.3% -6.2% Sell

Source: SICO Research, Note: return based on 31st May 2016 closing prices

1Q16 result summary: Strong performance overall

Exhibit 2: 1Q16 result summary

Net Inc

LCY % YoY % QoQ Cons SICO Cons SICO

Al Hammadi 22 -47% -40% 32 32 -33% -33%

Care 33 19% -6% 34 31 -1% 6%

Dallah 58 22% 7% 54 53 8% 10%

Mouwasat 71 27% 32% 60 62 19% 15%

Company

---1Q 2016--- --1Q16 Forecast-- Actual vs

Source: SICO Research

Saudi Healthcare names, with the exception of Hammadi, reported strong

results in 1Q16. All names under our coverage reported double-digit YoY

revenue growth, with Mouwasat at 21%, Dallah 18.6%, Care 15.7% and

Hammadi at 11%. SThe sector’s operating margins also expanded, led by

Dallah (+130bps), Mouwasat (+110bps) and Care (+80bps), while Hammadi’s

margins declined significantly, due to a fire at Olaya Hospital.

Exhibit 3: YoY revenue growth

Source: Company data, SICO Research

Exhibit 4: Operating margin trend


0%

10%

20%

30%

Mouwasat Dallah Care Hammadi

1Q15 2Q15 3Q15 4Q15 1Q16

10%

15%

20%

25%

30%

35%

Mouwasat Dallah Care Hammadi

1Q15 2Q15 3Q15 4Q15 1Q16


4

Longer payment cycle: A concern for MEH, Care and Hammadi

Among Saudi hospitals, Care and Middle East Healthcare already have had

high receivable days owing to government exposure, while the spike is more

recent in the case of Hammadi. The receivable days worsened to 246 days in

2015 for Care, 208 days for MEH and 162 days for Hammadi. We are more

comfortable with working capital cycles of Dallah and Mouwasat, where

receivable days have been close to 100 days during the past three years.

Exhibit 5: Receivable days on hand


Capacity growth to boost earnings

The four hospitals under our coverage plan to add c.1,800 beds and c.550

clinics over the next four years, increasing the total capacity by 73% and 71%

respectively. Al Hammadi has the highest bed capacity growth, with the

number of beds increasing from 300 in 2014 to 1,328 in 2019, implying a 6-

year CAGR of 28%. The respective bed capacity CAGR for Mouwasat, Dallah

and Care is 16%, 15% and 4%, respectively. Growth from clinics’ business is

the highest in Dallah, with the number of clinics increasing from 163 in 2014

to 642 in 2019.

Exhibit 6: Bed capacity growth

Source: SICO Research, based on disclosed plans

10994

115

172 171

10684

100

208

157

96 96

162

246

208

0

50

100

150

200

250

300

Dallah Mouwasat Al Hammadi Care Middle East

Healthcare

2013 2014 2015

200

400

600

800

1000

1200

1400

Mouwasat Hammadi Dallah Care MEH

2014 2015 2016 2017 2018 2019 2020


5

Exhibit 7: Clinic capacity growth


Saudi Arabia Vision 2030: what’s in it for Healthcare?

Below are the two key takeaways for the healthcare sector from Vision 2030:

Corporatisation: The Vision 2030 looks at the prospects of public facilities

competing with the private sector. This will enhance the capability, efficiency

and productivity of care and treatment, and increase the options available to

citizens.

Private medical insurance for all: The Vision 2030 document says private

medical insurance for all, suggesting that listed names should benefit in the

long run as an insured person will always prefer private hospitals to those run

by the Ministry of Health.

Saudi Arabia allocated SAR 105bn (+28% YoY from SAR 82bn in 2015) towards

health and social development in its 2016 budget. In 2015's original budget

allocation, SAR 160bn was allocated for both (civil and military healthcare

services); we believe the allocation for military health has been removed by

SAMA from this category and added to defence & security expense for 2015.

Exhibit 8: Saudi Arabia Healthcare spending


100

200

300

400

500

600

700

Mouwasat Hammadi Dallah Care MEH

2014 2015 2016 2017 2018 2019 2020

9.5%

12.5%

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

2015 2016

Budget allocation % of total


6

Valuations: Our preferred names Dallah and

Mouwasat are trading at reasonable multiples

The Saudi healthcare sector is trading at a median 2017 PER of 20.6x and offers

five year earnings CAGR (2015-20) of 15%. Both our preferred names - Dallah

and Mouwasat - are trading in line with the median at 20.6x and 20.7x

respectively. Al Hammadi continues to trade at a 58% premium to its peers, at

a 2017 PE of 32.5x; pricing in clear visibility on its expansion plans. Unlike

Mouwasat and Dallah, where expansions are expected to come online after 2-

3 years, Al Hammadi has already started commercial operations of Al-Suweidi

Hospital and completed 82% of its hospital in Al-Nuzha as of 31 March 2016.

Exhibit 9: Valuation- earnings growth and margin outlook summary

Actual

Valuation

Near term

Margin

outlook

Long term

earnings

growth

2011-15

CAGR (4

year)

2015-18

CAGR (3

year)

2015-20

CAGR (5

Year)

Hammadi Premium due to more visibility on expansion plans ↓ High 12.0% 15.4% 19.7%

Dallah Attractive ↑ High 9.8% 20.8% 20.4%

Mouwasat Reasonable ↑ Medium 9.0% 16.3% 14.6%

Care Cheap due to receivables exposure to Govt. and slower growth ↑ Low 8.4% 12.5% 9.7%

MEH Cheap due to receivables exposure to Govt. and slower growth ↔ Low 6.0% 7.4%

Earnings growth

Forecast


Care and MEH are trading at a discount to median, as both offer only single-

digit 5-year (2015-20 CAGR) earnings growth at 7.4% and 6.0% respectively.

The valuation discount also prices in the longer payment cycle and receivable

exposure to government entities.

Our top pick - Dallah - offers earnings CAGR of 20% over 2015-20, with a scope

of near-term margin improvement; however, valuations fail to capture the

premium the stock truly deserves.

Exhibit 10: PE (FY2017) vs 5 Year CAGR EPS growth



7

Exhibit 11: Coverage summary

2016e 2017e 2015e 2016e

Al Hammadi 41.4 Sell 40 40.5 30.0 1.4% 2.4%

Dallah Healthcare 81.9 Buy 100 25.5 20.9 1.5% 1.6%

Mouwasat 130.5 Buy 150 25.5 20.9 1.8% 2.2%

National Medical Care 58.8 Sell 55 19.0 16.8 3.4% 3.4%

Middle East Healthcare 69.4 Neutral 75 15.9 14.6 2.9% 2.9%

Dividend yieldName

Stock

Price, LCRating

Target

Price, LC

P/E

Note: Potential return based on 31st May 2016 closing prices


Relative Valuation

In general, healthcare companies trade at a premium to the broader market,

because of their defensive nature with low beta and high growth

expectations. In Saudi Arabia, healthcare stocks are currently trading at a

premium (2016E P/E of 25.5x) to the broader market. The Saudi hospital sector

trades at a 24.0% discount to emerging market peers

Exhibit 12: Relative Valuation

Name CurrencyStock

price

Mkt Cap

(in USD)2016e 2017e 2016e 2017e

Netcare Ltd South Africa ZAr 3,309 3,074 10.4 9.1 16.7 14.3

Mediclinic International Ltd South Africa ZAr 20,112 9,425 15.1 13.7 20.4 18.0

Life Healthcare Group Holdin South Africa ZAr 3,856 2,570 11.1 10.1 20.0 17.8

Bangkok Dusit Med Service Thailand THB 24 10,470 26.8 23.5 42.0 35.9

Bumrungrad Hospital Pub Co Thailand THB 197 4,026 24.0 21.2 38.7 34.1

Bangkok Chain Hospital Pcl Thailand THB 11 762 18.6 16.4 39.2 33.3

Raffles Medical Group Ltd Singapore SGD 2 2,004 25.7 22.3 38.0 33.2

Ihh Healthcare Bhd Malaysia MYR 6 12,932 23.3 20.4 49.7 40.9

Kpj Healthcare Berhad Malaysia MYR 4 1,085 14.5 12.9 29.5 26.3

Apollo Hospitals Enterprise India INR 1,369 2,835 21.8 18.0 44.3 33.8

Fleury Sa Brazil BRL 26 1,137 10.3 8.9 23.1 18.1

Nmc Health Plc UAE GBp 1,140 3,098 15.6 13.1 20.9 16.7

Emerging market Healthcare mutiples 17.1 15.0 33.7 29.7

Al Hammadi Saudi Arabia SAR 41.4 1,324 32.4 22.4 40.5 30.0

Dallah Healthcare Saudi Arabia SAR 81.9 1,288 18.7 15.2 25.5 20.9

Mouwasat Saudi Arabia SAR 130.5 1,740 19.7 16.3 25.5 20.9

National Medical Care Saudi Arabia SAR 58.8 703 13.3 12.4 19.0 16.8

Middle East Healthcare Saudi Arabia SAR 69.4 1,703 15.3 14.1 15.9 14.6

Saudi Healthcare mutiples 18.7 18.3 25.5 20.9

EV/EBITDA P/E

Note: based on 31st May 2016 closing prices



8

Company Sections


9

Middle East Healthcare : Lacking growth drivers

Limited earnings growth potential over the long-term due to absence of

aggressive growth plans

High receivables and longer payment cycle are also concerns

Initiate with an “Neutral“ rating and price target of SAR 75

Slower growth compared to peers

Unlike its peers, Middle East Healthcare (MEH) does not have aggressive

growth plans. It is planning to add 150 beds/35 clinics in 2Q16 at Hail (33%

stake) and 150 beds/100 clinics in 1Q18 at Dammam, taking its total capacity

from 788 beds/281 clinics to 986 beds/392 clinics in 2018. Excluding this, the

company has not announced any further bed capacity addition in the medium-

term, unlike Dallah, Mouwasat and Al Hammadi. The six-year CAGR (2014-20)

bed capacity growth for MEH is only 3.8%, much lower than 14.4%/15.8%/

28.1% for Dallah, Mouwasat and Hammadi, respectively. Lack of new capacity

additions beyond the hospitals at Hail and Dammam implies weaker growth

potential for the company over the longer-term.

Optimum utilisation to support earnings growth

In the absence of aggressive expansion plans, we expect MEH to operate at

higher utilisation levels, resulting in lower direct costs, administrative fees and

selling expenses. However, improvement in utilisation levels along with higher

average price per patient, should result in three-year earnings growth CAGR

(2015-18) of only 6.0%, well below 21% / 16% for Dallah/Mouwasat.

Concern on increasing and ageing receivables

MEH’s receivables have increased to SAR 875mn at FY15-end from SAR 600mn

at FY14-end. The receivable days have also worsened to 208 days in 2015 from

157 in 2014, much higher than 96 days for both Dallah and Mouwasat. Total

account receivables as of 30 June 2016 stood at SAR 755mn, out of which SAR

447mn (59%) is due from the Ministry of Health and SAR 180mn from

Insurance companies (24%).

Valuation and rating

We initiate on Middle East Healthcare with a “Neutral” rating and a target

price of SAR 75. The company trades at 15.9x EPS (2016e) and offers 7.4%

CAGR (2015-20) EPS growth. The stock has returned 8.4% since its listing on

Tadawul, but we do not see much value given our expectation of lower EPS

growth.

© SICO 2016 All Rights Reserved

Attention is drawn to the disclaimer and other information in the end

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Summary Financials

SAR mn 2014A 2015A 2016E 2017E 2018E CAGR (%)

Sales 1,399 1,535 1,587 1,696 1,770 6.1

Gross Income 750 810 834 899 949 6.1

Gross Margin (%) 53.6 52.8 52.6 53.0 53.6

Operating Income 320 386 382 416 444

Operating Margin (%) 22.9 25.2 24.1 24.5 25.1

Net Income 332 390 401 437 465

Net Margin (%) 23.7 25.4 25.3 25.7 26.3

EPS 3.61 4.24 4.36 4.74 5.06

Source: Company, SICO Research, Bloomberg

Price Data (SAR)

Current Price 69.37

Target Price 75.00

52 wk High/Low 78.50/66.75

Ratings

Short-term Neutral

Long-term Neutral

Risk Profile Normal

Market Data

Sector Healthcare

Market Cap USD 1.70bn

Primary Exchange Saudi Arabia

Other Exchange

Reuters 4009.SE

Bloomberg MEH AB Equity

Free Float 37%

Valuation Ratios

2015A 2016E

P/E x 16.4 15.9

P/BV x 4.7 4.1

EV/EBITDA x 14.6 15.1

Div Yld % 2.9 2.9

Trading Data

Daily Vol (6M Avg) 0.0

Daily T/o (6M Avg USD) 0.0

Issued Shares 92.0

All in millions

Relative Price Performance

Restated to 100

Performance (%) 1m 3m 12m

Absolute (6.4) 0.0 0.0

Relative (1.1) 0.0 0.0

Source: SICO Research, Bloomberg

Nitin Garg, CFA

+973 1751 5000 ext 5059

[email protected]

www.sicobahrain.com

0.90

1.00

1.10

1.20

Ap

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Ap

r-16

Ma

y-1

6

Ma

y-1

6

Ma

y-1

6

Ma

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6

Tadawul MEH


10

Company Profile

The company’s main activity is to own, manage, operate and maintain

hospitals. Currently, Middle East Healthcare fully owns four hospitals located

in Jeddah (SGH Jeddah), Riyadh (SGH Riyadh), Al Madinah (SGH Madinah) and

Khamis Mushait (SGH Aseer). MEH also owns 32.33% of the share capital of

NHC (a company subsidiary), a closed joint stock company registered in Hail to

set up, manage, operate and maintain hospitals. NHC is currently in the process

of developing a new hospital in Hail (SGH Hail), expected to commence

operation in 2016. In addition, the company is currently developing the

necessary designs and plans to build a new hospital in Dammam (SGH

Dammam 100% owned), to be established on a plot of land owned by MEH,.

buthas not yet initiated the construction work. MEH also entered into

Management Supervision Agreements in relation to a number of hospitals

outside the Kingdom, namely in Dubai, Cairo and Sanaa. These hospitals use

the “Saudi German Hospital” brand as their trade name.

Exhibit 13: Shareholding pattern

Shareholding Pattern Pre offering Post offering

Bait Al-Batterjee Medical Company 78.13% 54.69%

IFC 12.04% 8.43%

Zuhair Ahmed Al- Sebai 4.66% 3.26%

IDB 2.08% 1.45%

Arab Fund 1.63% 1.14%

Sobhi Abduljaleel Batterjee 1.38% 0.96%

Source: Company data

Exhibit 14: Share of revenue by segment, 2015


Exhibit 15: Share of revenue by client type, 2014


The company’s business is divided into three segments: inpatient, outpatient

and pharmaceuticals. The inpatient segment accounted for 56.5% of revenues

in 2015 (declining from 58.2% in 2014), while the outpatient segment’s

contribution increased from 23.3% to 25.3%. The pharmaceutical segment’s

share of revenues remained flat at 18.2% in 2015. At a revenue level, insurance

customers accounted for 39.8% of revenues in 2014, Ministry of Health

patients accounted for 30.9%, while cash clients and direct corporate clients

formed 19.0% and 10.4% of revenues in 2014.

56.5%25.3%

18.2%

Inpatient revenue Outpatient revenue Pharmacy

39.8%

30.9%

19.0%

10.4%

Insurance Ministry of Health

Cash Clients Direct Clients


11

Exhibit 16: Inpatient market share


Exhibit 17: Outpatient market share


Exhibit 18: Middle East Healthcare Hospitals

SGH Riyadh Hospital

(Established

1988)

SGH Aseer Hospital

(Established

2000)

SGH Madinah

Hospital (Established

2002)

219

Beds69

Clinics

194

Beds56

Clinics

184

Beds51

clinics

AJ sons

(Established2004)

114Beds36

clinics

SGH

Dammam Hospital

(Established

150 Beds100

clinics

SGH Jeddah Hospital

(Established 1988)

191Beds105

Clinics

NHC Hospital (Established

2014)

150Beds

35

clinics

Source: Company Data

Saudi German Hospital – Jeddah

Commencing operations in 1988, SGH Jeddah is a tertiary care hospital

covering all medical and surgical specialties, diagnostic facilities and support

services, with 191 beds. The hospital is located on Batterjee Street in the prime

Al Zahra district area of Jeddah, close to Jeddah airport. The facility consists of

the main building (inpatient hospital building) with a built-up area of 18,745

square metres, and the medical tower with a built-up area of 10,902 square

metres.

Saudi German Hospital – Aseer

SGH Aseer started operations in March 2000. It is a 194-bed multi-specialty

tertiary care hospital located on the Abha Khamis Mushait Highway in Aseer.

The main hospital building has a built-up area of 35,893 square metres. The

hospital is easily accessible from the airport and by road from other parts of

Aseer and neighbouring regions.

Saudi German Hospital – Riyadh

SGH Riyadh is a 219-bed multi-specialty tertiary care hospital located on the

King Fahad Road close to the main business and residential districts, easily

accessible from all areas of Riyadh city and neighbouring areas. The hospital is

built on a plot area of 29,880 square metres, with a built-up area of 35,188

square metres.

Saudi German Hospital - Madinah

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Riyadh Jeddah Madinah Aseer Total

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Riyadh Jeddah Madinah Aseer Total


12

SGH Madinah is a 184-bed multi-specialty tertiary care hospital under

operations since 2003. The hospital is located in Madinah outside the Haram

area located on Prince Naif bin AbdulAziz Road. The hospital is built on a plot

of 70,771 square metres, with the main hospital building having a built-up

area of 34,751 square metres.

Exhibit 19: Middle East Healthcare hospitals

Hospital

Land

area in sq

meters

Built up

area

Number

of clinics

Number

of beds

Number

of

doctors

SGH Jeddah 33,375 57,787 105 191 238

SGH Riyadh 37,567 46,870 69 219 126

SGH Aseer 55,644 49,093 56 194 102

SGH Madinah 65,606 48,151 51 184 100


Growth prospects: not aggressive, unlike peers

Expanding in new cities: MEH intends to grow by establishing new hospitals

in Hail and Dammam. SGH Hail’s capacity will be 150 beds and 35 outpatient

clinics, with construction expected to be completed during 1H16. The company

has finalised the preliminary designs for the construction of SGH Dammam,

which will have a capacity of 150 beds and 100 outpatient clinics. It intends to

appoint a contractor to begin the construction of SGH Dammam. We have

pencilled in 2017 as the start up for Hail project, and a 2019 startup for the

Dammam project in our valuation model.

Exhibit 20: Bed capacity growth


Exhibit 21: Clinic capacity growth

700

800

900

1000

2014 2015 2016 2017 2018 2019 2020200

250

300

350

400

2014 2015 2016 2017 2018 2019 2020


13

The following table shows a summary of SGH Hail and SGH Dammam projects:

Exhibit 22: Middle East Healthcare: upcoming projects

Des cription SGH Hail SGH Dammam

Stake owned 32.30% 100.0%

Capacity

150 beds

35 outpatient clinics

6 operating rooms

150 beds

100 outpatient clinics

8 operating rooms

Project land area 89,213 m2 30,000 m2

Project’s built-up area (hospital buildings

excluding staff housing)19,551 m2 39,283 m2

Project’s expected cost (excluding land cost) SAR 176mn SAR 307mn

Project’s expected cost (including land cost) SAR 180mn SAR 350mn

Expected date of completion of construction 1Q16 4Q17

Expected date of operation 2Q16 1Q18

Completion Percentage (Paid Value)

61.16% (achieved from the entire project)

81.38% (the main hospital)

87.51% (staff housing)

Main licenses obtained

Ministry of Municipality and Rural Affairs

license in respect of the civil construction

works, MOH preliminary approval

MOH preliminary approval

Main Licenses to be obtained

Final license from Hail Municipality

Civil Defense License

MOH License

Project land ownership Owned by NHC Owned by the Company

Source of funding

Shareholder equity 38.26%

Loan from MoF 33.17%

Suppliers Credit 6.67%

Bank loans 21.90%

Self-funding sources

Loan from MoF

Suppliers Credit

Bank loansSource: Company Data

Expand current facilities of existing hospitals: MEH is in the process of

implementing plans to increase thebed capacity at its existing hospitals by a

further 85 beds over the next three years (SGH Jeddah – 32 beds, SGH Riyadh

– 30 beds, and SGH Madinah – 23 beds). Furthermore, it also plans to open 62

new outpatient clinics during the same period (SGH Jeddah – 22 clinics, SGH

Aseer – 40 clinics). We will incorporate these expansions plan into our

valuations once tangible progress is made.

Financial Review

Revenue and earnings growth

We expect Middle East Healthcare’s revenues to rise 7.7% over 2015–20E,

primarily driven by the company’s expansion plans and higher average price

per patient. The bulk of growth during 2015-17E should come from improving

utilisation levels of existing hospitals; while the earnings growth in later years

(2018-20) will come from greenfield expansions: Hail hospital and Dammam

Hospital. MEH’s total capacity is expected to reach 986 beds in 2018 from the

current 788 beds. We expect the company’s net profit to grow at a CAGR (15-

20E) of 7.4%, reaching SAR 558mn in FY20.

Margin analysis

We expect operating margins to increase by 40bps in 2017 and 60bps in 2018,

reaching 25.1% in 2018 from 24.1% in 2016. Post 2018, we expect margin


14

pressure as Dammam hospital will come online in 2019. We forecast 23.3%

operating margin in 2019-20.

Debt levels and capital expenditure

MEH’s capex requirements are not significant, especially in the context of the

industry. The company’s capital structure is conservative, with a net debt to

equity for 2015 at 11% compared to 26% for Hammadi and 32% for Dallah,

and capex requirements can be easily met by debt finance. MEH is expected to

remain free cash flow positive, with cumulative operating cash flow

generation > SAR 1.0bn over 2016-18. We believe the company is in a

comfortable position to not only service its debt, but also maintain and

possibly increase dividend payments to shareholders.

Dividend payment

We assume MEH to increase its dividend pay-out ratio from an average 45%

in 2015-16 to 55% starting FY18. Dividend yields are expected to remain in the

range of 3.0–4.0%.

Valuation: Target price SAR 75, Recommendation “Neutral”

We use a standard Discounted Cash Flow (DCF) model based on a detailed 5-

year forecast, followed by a further 5 years based on assumptions for key lines

such as sales growth, margins, capital expenditure and terminal value. We

have considered a 10-year period for DCF instead of the usual 5-year period as

the company is currently in growth phase and would take a few years to reach

stability. Based on current expansion plans, we assume 2019-2020 to be

normalised years in order to provide a realistic basis on which to project outer

years.

We believe a DCF valuation reflects the value of the producing assets and likely

new projects over the longer-term. The DCF approach yields a 1-year target

price of SAR 75 per share – the DCF value is based on a nominal Weighted

Average Cost of Capital (WACC) of 9.05% (and we have assumed 3% long-

term growth beyond 2025), a 5.25% risk-free rate, 6.0% risk premium and beta

of 1.00.

Our valuation assumptions used for DCF are presented below:

Beta: Since the company has only two months of trading history, we have used

beta of 1.00x for valuation purposes.

Risk Free Rate: The risk free rate is calculated as 5.25% which is a sum of 3.25%

(80% weightage to last 15-year average of US 10-year bond yield; and 20%

weightage to last one-year average of US 10-year bond yield) + 1.5% (1.5*

Saudi Arabia country risk premium).

Equity Risk Premium: We have assumed an equity risk premium of 6.0%

comprising 4.5% of global equity risk premium adjusted for developing

countries. We add 1.5% standard premium to Equity premium to account for

illiquidity and lower disclosure risks

Cost of Equity: Based on the above assumptions, Middle East Healthcare's cost

of equity equates to 11.29%.

WACC: We assume a cost of debt of 4%, which is conservative as the

government provides an interest-free funding facility of up to SAR 200mn or

50% of set-up costs for private hospital projects, with attractive repayment

terms. Based on the above assumptions, the estimated WACC works out to be

9.05%.


15

Terminal Growth: We have assumed a terminal growth rate of 3% for

valuation purposes based on expected long-term nominal growth of the

Kingdom.

Exhibit 23: Cost of equity assumptions Metric Value Remarks

Base risk-free-rate A 3.25% (0.8)* (Average of US 15 Year bond)+(0.2)*(Average of preceding year

US 10 yr bond)

Country risk premium B 2.0% 1.5 x Country default spread

Saudi Risk Free Rate C = A + B 5.25%

Global equity risk premium D 4.5% Long-term equity market returns for global markets. This takes into

account the returns generated by the S&P 500 (which has the longest

history, and represents the most developed equity market in the world) for the period 1928-2013. Accordingly, during this period, the S&P 500

generated an excess return of 4.62% over the risk free asset (US 10- year

treasury)

Beta E 0.8 5 year Beta of the more liquid names in the sector

Country equity risk premium

F 1.5% Illiquidity and disclosure premium

Cost of equity G = C + F + (D x E)


Risks

Huge receivables and exposure to Govt. entity

MEH’s receivable days worsened to 246 days in 2015 from 157 days in 2014

owing to government exposure. Total account receivables as of 30 June 2016

stood at SAR 755mn, out of which 447mn (59%) are due from Ministry of

Health and SAR 180mn from Insurance companies (24%).

Delays or cost overruns in expansion plans

Any delay in adding new beds or higher-than-expected capex incurred could

pose a significant risk to our estimates and impact our valuations.

Constraints on availability of skilled talent pool

The sector is expanding aggressively and will need to add medical staff

commensurate with its expansion. There could be constraints to the

availability of experienced medical staff, which could potentially hamper

growth plans.

Policy formulation

A restrictive policy that discourages private sector participation would

adversely affect the strong sector fundamentals.

Improvement at government hospitals

Efficiency and service quality improvement at government hospitals could

pose a risk to the private players. Recently, Arabian Business reported that

expatriates in Saudi Arabia will be able to use government hospitals for

treatment as long as they pay a designated fee and follow the centres’ rules

and regulations, according to the Ministry of Health. The decision was taken

due to a large number of expats living in rural areas where few or no private

hospitals are provided. We believe that listed Saudi hospital names would be

least impacted as all names operate in urban areas like Riyadh, Jeddah and

Dammam. Also, insurance is mandatory for expats, and an insured will always

prefer private hospital to those run by the Ministry of Health.

Saudisation risk

Stringent Nitaqat regulations could force the company to hire Saudi nationals

in order to maintain Saudisation levels


16

Others risks

Other risks are related to cost management. Higher-than-expected cost

inflation (labour, raw materials and fuel costs are the greatest risks) will erode

margins.

Financials

Income Statement (Consolidated)

Year ending 31 Dec (SAR mn)

2014A 2015A 2016E 2017E 2018E

Revenue 1,399 1,535 1,587 1,696 1,770

Cost of Goods Sold (649) (724) (753) (797) (821)

Gross Profit 750 810 834 899 949

Selling, General and Admin. Expenses (430) (424) (452) (483) (504)

EBITDA 371 446 432 469 501

Operating Profit 320 386 382 416 444

Other Income 23 16 24 25 27

Net Interest Income (4) (4) (3) (3) (3)

Tax (1) 0 0 0 0

Minority Interest 0 0 0 0 0

Net Profit 332 390 401 437 465

Balance Sheet (Consolidated)


2014A 2015A 2016E 2017E 2018E

Cash & Short Term Deposits 136 56 120 207 314

Other Current Assets 710 1,006 1,077 1,147 1,194

Investments 0 0 0 0 0

Net Fixed Assets 808 839 890 939 985

Net Intangible Assets 0 0 0 0 0

Other Non-Current Assets 124 156 156 156 156

Total Assets 1,778 2,057 2,243 2,449 2,649

Current Liabilities 357 389 388 399 405

Total Debt 163 169 138 127 113

Other Liabilities (69) (73) (44) (32) (19)

Total Liabilities 591 643 612 612 604

Minority Interest 47 61 61 61 61

Share Capital 767 920 920 920 920

Reserves & Surplus 373 432 649 856 1,063

Shareholders Funds 1,140 1,353 1,570 1,776 1,984

Total Equity & Liabilities 1,778 2,057 2,243 2,449 2,649


17

Financials

Cash Flow Statement (Consolidated)


2014A 2015A 2016E 2017E 2018E

Net profit before minority 332 390 401 437 465

Depreciation 45 52 49 51 54

Other Adjustments 19 18 0 0 0

Working Capital Changes (47) (266) (70) (59) (41)

Cashflow from Operations 349 194 379 429 478

Capital Expenditure (110) (83) (100) (100) (100)

Other Investing Activities (14) (32) 0 0 0

Cashflow from Investing (123) (115) (100) (100) (100)

Debt Raised/Repaid (34) 4 (31) (11) (13)

Dividend (92) (166) (184) (230) (258)

Other Financing Activities (7) 2 0 0 0

Cashflow from Financing (134) (159) (215) (241) (271)

Net Chg in Cash 92 (80) 64 87 107

Note: The above statements may not match the published cash flow statements due to adjustments made by us.

Key Ratios (Consolidated)


2014A 2015A 2016E 2017E 2018E

EPS 3.61 4.24 4.36 4.74 5.06

EPS Growth (%) 72.4 17.6 2.8 8.9 6.6

Gross Margin (%) 53.6 52.8 52.6 53.0 53.6

EBITDA Margin (%) 26.5 29.1 27.2 27.6 28.3

EBITDA Growth (%) 47.5 20.3 (3.2) 8.4 7.0

Net Margin (%) 23.7 25.4 25.3 25.7 26.3

ROAE (%) 29.1 28.9 25.5 24.6 23.5

ROAA (%) 18.7 19.0 17.9 17.8 17.6

Debt/Equity (%) 17.6 15.2 11.1 9.2 7.5

Valuation Ratios

PER (x) 19.2 16.4 15.9 14.6 13.7

PBV (x) 5.6 4.7 4.1 3.6 3.2

Dividend Yield (%) 1.4 2.9 2.9 3.6 4.0

EV/EBITDA (x) 17.5 14.6 15.1 13.9 13.0



18

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Price Data (SAR)

Current Price 41.39

Target Price 40.00

52 wk High/Low 65.75/32.00

Ratings

Short-term Neutral

Long-term Sell

Risk Profile High

Market Data

Sector Healthcare


Primary Market Saudi Arabia

Other Exchg

Reuters 4007.SE

Bloomberg AlhammadAB

Free Float 30%

Valuation Ratio

2015A 2016E

P/E x 35.1 40.5

P/BV x 3.6 3.5

EV/EBIDTA x 29.4 30.6

Div Yld % 1.8 1.7

Trading Data



Issued Shares 120.0

All in millions


Absolute -7.1 1.2 -34.8

Relative -1.9 -4.6 -1.3


[email protected]

www.sicobahrain.com

Al Hammadi Company for Development and

Investment: Facing margin pressure

Fire at Olaya Hospital and longer working capital cycle are the key

concerns

Poor 1Q at all levels, net income at SAR 21.6mn (-47.4% YoY, -40% QoQ),

a big miss on our SAR 32mn estimate

Downgrade to “Sell“ rating with a revised price target of SAR 40 (SAR 45)

1Q16 result review: poor numbers across the board

Al Hammadi reported 1Q16 net income of SAR 21.6mn (-47.4% YoY, -40%

QoQ), missing our SAR 32mn estimate. Gross profit grew by 8% YoY due to

an 11% increase in revenues, led by increase in inpatient traffic. However,

operating profit and net income declined 39% and 47%, respectively due to:

(i) increase in depreciation expenses and financial charges attributable to the

opening of Al Sweidi hospital; (ii) closure of Olaya branch during 1Q16 as a

result of an electrical contact incident on 7 February 2016; and (iii) the

collection of SAR 9.8mn written-off debt in 1Q15 which resulted in higher

base.

Exhibit 24: 1Q16 Result summary


Revenues 144 11% -9% 152 -5%

Gross Profit 54.6 8% -23%

Gross margin 37.9%

EBIT 26.5 -39% -34% 38.5 -31%

EBIT margin 18.4% 25.3%

Net Profit 21.6 -47% -40% 32 32 -33% -33%

Net margin 15.0% 21.1%



Temper near-term expectations: faces near-term margin pressure

Revenues grew 26% YoY and 22% YoY in 3Q15 and 4Q15, but slowed to

11% in 1Q16 due to a fire at Olaya Hospital. This facility is currently closed

and all inpatients have been shifted to Al Suweidi Hospital. We pencil in a

January 2017 start up for Olaya Hospital in our model. The receivable days

have also worsened to 162 days in 2015 from 100 in 2014, much higher than

96 days for Dallah and Mouwasat.

Stock still trades at premium to peers

Al Hammadi continues to trade at premium to Saudi peers. On our 2017

estimates, Hammadi trades at PE of 30.0x, implying 44% premium to median

of Saudi peers and pricing in clear visibility on its expansion plans. Unlike

Mouwasat and Dallah, where expansions are coming online after 2-3 years,

Al Hammadi has already started commercial operations at Al Suweidi

Hospital and completed 82% of its hospital in Al- Nuzha as of 31 March 2016.

Cut target price to SAR 40 (from SAR 45) and downgrade to sell rating

We see slower revenue growth and weaker margins post poor 1Q,

considering the impact of fire at Olaya hospital. We revise down our

2016/17/18 estimates by 22%/13%/15% and cut our DCF based target price

to SAR 40 from SAR 45 while downgrading the stock to Sell from Buy Rating.


19

Al Hammadi Company for Development and Investment Financials



2015A 2016E 2017E

Revenue 561 695 1,002

Cost of Goods Sold (315) (443) (651)

Gross Profit 246 253 352

Selling, General and Admin. Expenses (93) (118) (170)

EBITDA 184 177 257

Operating Profit 153 134 181

Other Income 3 3 3

Net Interest Income (6) (7) (8)

Tax (9) (8) (11)

Minority Interest 0 0 0

Net Profit 141 123 166



2015A 2016E 2017E

Cash & Short Term Deposits 89 263 172

Other Current Assets 291 218 308

Investments 0 0 0

Net Fixed Assets 1,556 1,766 1,765

Net Intangible Assets 0 0 0

Other Non-Current Assets 0 0 0

Total Assets 1,936 2,248 2,246

Current Liabilities 241 267 290

Total Debt 426 696 623

Other Liabilities (276) (523) (452)

Total Liabilities 550 822 775


Share Capital 1,200 1,200 1,200

Reserves & Surplus 186 225 270

Shareholders Funds 1,386 1,425 1,470

Total Equity & Liabilities 1,936 2,247 2,245



2015A 2016E 2017E

Net profit before minority 141 123 166

Depreciation 31 43 75

Other Adjustments 44 0 0

Working Capital Changes (150) 75 (65)

Cashflow from Operations 67 240 176

Capital Expenditure (175) (253) (74)

Other Investing Activities 0 0 0

Cashflow from Investing (175) (253) (74)

Debt Raised/Repaid (271) 270 (73)

Dividend (75) (84) (120)

Other Financing Activities 0 0 0

Cashflow from Financing (346) 186 (193)

Net Chg in Cash (454) 173 (91)

Note: The above statements may not match the published cash flow statements

due to adjustments made by us.



2015A 2016E 2017E

EPS 1.18 1.02 1.38

EPS Growth (%) 9.6 (13.2) 34.9

Gross Margin (%) 43.9 36.3 35.1

EBITDA Margin (%) 32.8 25.5 25.6

EBITDA Growth (%) 27.1 (3.9) 45.0

Net Margin (%) 25.2 17.6 16.5

ROAE (%) 10.2 8.6 11.3

ROAA (%) 7.3 5.5 7.4

Debt/Equity (%) 19.9 36.7 30.8

Valuation Ratios

PER (x) 35.1 40.5 30.0

PBV (x) 3.6 3.5 3.4

Dividend Yield (%) 1.8 1.7 2.4

EV/EBITDA (x) 29.4 30.6 21.1



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Price Data (SAR)

Current Price 81.87

Target Price 100.00

52 wk High/Low 117.20/49.50

Ratings

Short-term Positive

Long-term Buy

Risk Profile High

Market Data

Sector Healthcare



Other Exchg

Reuters 4004.SE

Bloomberg DallahAB

Free Float 40%

Valuation Ratio

2015A 2016E

P/E x 29.3 25.5

P/BV x 3.5 3.2


Div Yld % 1.8 1.8

Trading Data



Issued Shares 59.0

All in millions


Absolute -2.1 19.5 -26.2

Relative 3.2 13.6 7.2


[email protected]

www.sicobahrain.com

Dallah Healthcare: Top pick

Strong expansion plans; however, majority will materialise from 2017-18;

near-term growth from brownfield expansions at Al Nakheel Hospital

Strong 1Q at all levels, net income at SAR 58.3mn (+22% YoY, +6.8%

QoQ), 9.5% higher than estimates

Maintain “Buy“ rating and increase price target to SAR 100

1Q16 result review: strong quarter

Dallah reported 1Q16 net income of SAR 58.3mn (+22% YoY, +6.8% QoQ),

9.5% higher than our SAR 53mn estimate. Gross profit was SAR 132.8mn

(+30.1%YoY, +13.7%QoQ), with operating profit at SAR 62.2mn

(+26.2%YoY, +9.1%QoQ). YoY improvement came from an increase in

revenues led by higher number of inpatients and outpatients, better

operating rate from the North clinics building, and enhancing some

contractual terms for services which led to increase in overall average

operating capacity. Operating margin expanded to 21.8% compared to

20.5% in 1Q15 and 20.6% in 4Q15. We expect margins to be sustained at

these levels, as Dallah is not adding any new capacity in 2016; and forecast

17.8% operating margin in 2016, +70bps from 17.1% in 2015.



Revenues 285 19% 3% 272 5%

Gross Profit 132.8 30% 14%

Gross margin 46.6%

EBIT 62.2 26% 9% 55.2 13%


Net Profit 58.3 22% 7% 54 53 8% 10%




Strong expansion plans; however, majority not until 2017-18

The company’s total capacity is expected to reach 1,003 beds/642 clinics by

2018 from 448 beds/163 clinics, translating into a net income growth CAGR

of 20% during the 2015-20 period. Dallah has no plans to add any capacity

in 2016, and therefore higher patient volume along with increasing

utilisation of existing assets would account for the bulk of 2016E earnings

growth. Revenue grew 19% YoY in 1Q16 higher than 12%/8%/13%/9% over

past four quarters. Considering strong 1Q, we estimate 14.7% revenue

growth in 2016 compared to 10.2% in 2015. Beyond 2016, Dallah’s equity

story would depend on the success of the greenfield Namar hospital (initial

300 beds with c.70% capacity addition) that is set to commence operations

in 2018.

Increase target price to SAR 100 (from SAR 85), maintaining “Buy” rating

We forecast higher revenue growth and stronger margins post strong 1Q

and accordingly revise up our 2016/17/18 net income estimates by 3%/2%1%

and increase our DCF based target price to SAR100 from SAR 85. Dallah is

currently our top pick in the sector and we maintain our Buy rating the

name.


21

Dallah Healthcare Holding Co. Financials



2015A 2016E 2017E

Revenue 986 1,131 1,340




EBITDA 222 271 334


Other Income 11 12 12


Tax (10) (12) (15)





2015A 2016E 2017E



Investments 279 279 279




Total Assets 2,002 2,886 2,981


Total Debt 393 1,158 1,133

Other Liabilities (245) (1,010) (985)

Total Liabilities 609 1,392 1,373


Share Capital 590 590 590

Reserves & Surplus 803 904 1,017





2015A 2016E 2017E




Working Capital Changes 54 (70) (43)



Other Investing Activities (142) 0 0


Debt Raised/Repaid 197 765 (25)

Dividend (47) (89) (118)


Cashflow from Financing 150 676 (143)

Net Chg in Cash 28 315 (312)





2015A 2016E 2017E

EPS 2.80 3.21 3.91

EPS Growth (%) 12.2 14.7 22.0

Gross Margin (%) 41.4 44.9 45.5

EBITDA Margin (%) 22.5 24.0 24.9

EBITDA Growth (%) 16.8 22.2 23.0

Net Margin (%) 16.7 16.7 17.2

ROAE (%) 11.8 12.7 14.4

ROAA (%) 8.2 6.6 7.7

Debt/Equity (%) 28.2 77.5 70.5

Valuation Ratios

PER (x) 29.3 25.5 20.9

PBV (x) 3.5 3.2 3.0


EV/EBITDA (x) 29.3 25.5 20.9



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Price Data (SAR)

Current Price 130.47

Target Price 150.00

52 wk High/Low 154.50/94.00

Ratings

Short-term Positive

Long-term Buy

Risk Profile Normal

Market Data

Sector Healthcare



Other Exchg

Reuters 4002.SE

Bloomberg MOUWASATAB

Free Float 48%

Valuation Ratio

2015A 2016E

P/E x 31.2 25.5

P/BV x 5.7 5.0


Div Yld % 1.5 1.9

Trading Data



Issued Shares 50.0

All in millions


Absolute -2.2 14.2 -9.7

Relative 3.1 8.4 23.7


[email protected]

www.sicobahrain.com

Mouwasat: Buy with modest upside

Strong 1Q with net income at SAR 71mn (+27% YoY, +32% QoQ), 15%

higher than estimates

Riyadh Hospital operations stabilised, and we expect 190bps operating

margin improvement in 2016 over 2015

Maintain ”Buy“ rating with a revised price target of SAR 150

1Q16 result review: better operating margins push earnings

Mouwasat reported 1Q16 net income of SAR 71.1mn (+27.2% YoY, +32.2%

QoQ), 15% higher than our SAR 62mn estimate. Gross profit was SAR

146.1mn (+23.2%YoY, +28.2%QoQ), with operating profit at SAR 78.4mn

(+26.2%YoY, +29.2%QoQ). According to management, Riyadh Hospital

contributed to the overall revenue growth. Operating margin expanded to

25.5% compared to 24.5% in 1Q15 and 22% in 4Q15. We highlighted this in

our initiation report KSA Healthcare - Prescription for long term growth and

healthy returns (published on 14 October 2015) - that margins should

improve from 2016 onwards as Riyadh Hospital matures. We expect margins

to be sustained at these levels, and forecast 24.2% operating margin in 2016,

+190bps from 22.3% in 2015.



Revenues 307 21% 11% 300 2%


Gross margin 47.6%

EBIT 78.4 26% 29% 68.9 14%


Net Profit 71.1 27% 32% 60 62 19% 15%




Aggressive expansion plan to drive strong earnings growth

The company’s total capacity is expected to reach 1,290 beds/318 clinics by

2019 from 710 beds/198 clinics in 2015, translating to a net income growth

CAGR of 15% during the 2015-20 period. The company has no plans to add

any capacity in 2016/17/18 except 100 additional beds at Jubail Hospital in

2016, which is a brown field expansion and carries lower risk on margins.

Mouwasat has obtained approval from the Ministry of Health to start

operations at the Jubail Hospital extension and has guided for 4% revenue

growth from this unit.

Higher patient volume plus increasing contribution from Riyadh hospital

would account for the bulk of 2016-17E earnings growth. The revenue grew

21% YoY in 1Q16 led by contribution from Riyadh hospital, higher than

4%/12%/7%/12% growth achieved in past four quarters. We estimate 15%

revenue growth in 2016 compared to 6%/11% in 2014/15.

Increase target price to SAR 150 (from SAR 140) and maintain “Buy” rating

We see higher revenue growth and stronger margins post strong 1Q and

accordingly revise up our 2016/17/18 net income estimates by 1%/2%/3%

and increase our DCF based target price to SAR 150 from SAR 140. We

continue to maintain Buy rating on Mouwasat with modest 15.0% upside.


23

Mouwasat Medical Services Co. Financials



2015A 2016E 2017E

Revenue 1,055 1,218 1,431




EBITDA 287 355 427




Tax (16) (22) (27)

Minority Interest (14) (18) (22)




2015A 2016E 2017E



Investments 9 31 39




Total Assets 1,875 2,083 2,346






Share Capital 0 0 0






2015A 2016E 2017E




Working Capital Changes (103) (12) (40)





Debt Raised/Repaid 36 20 44

Dividend (100) (125) (150)

Other Financing Activities (5) 0 0

Cashflow from Financing (69) (105) (106)

Net Chg in Cash (101) 66 128





2015A 2016E 2017E

EPS 4.18 5.12 6.25

EPS Growth (%) (13.0) 22.5 22.1

Gross Margin (%) 52.5 54.9 55.2

EBITDA Margin (%) 27.2 29.1 29.9

EBITDA Growth (%) 4.3 23.4 20.5

Net Margin (%) 19.8 21.0 21.8

ROAE (%) 18.4 19.8 21.1

ROAA (%) 11.1 12.3 13.3

Debt/Equity (%) 27.2 30.5 31.1

Valuation Ratios

PER (x) 31.2 25.5 20.9

PBV (x) 5.7 5.0 4.4


EV/EBITDA (x) 23.8 19.3 16.0



24

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Price Data (SAR)

Current Price 58.75

Target Price 55.00

52 wk High/Low 69.00/40.70

Ratings

Short-term Neutral

Long-term Sell

Risk Profile High

Market Data

Sector Healthcare



Other Exchg

Reuters 4005.SE

Bloomberg CAREAB

Free Float 59%

Valuation Ratio

2015A 2016E

P/E x 20.2 19.0

P/BV x 2.9 2.8


Div Yld % 3.4 3.4

Trading Data



Issued Shares 44.9

All in millions


Absolute 4.2 39.3 -11.7

Relative 9.5 33.4 21.7


[email protected]

www.sicobahrain.com

National Medical Care: Searching for catalysts

Limited growth potential over the long-term, receivables exposure to

Govt. entities, and longer payment cycle are the chief concerns

Strong 1Q numbers at all levels, SAR 33mn net income beating our SAR

31mn estimate

Downgrade to “Sell“ rating with a revised price target of SAR 55

1Q16 result review: strong quarter

Care reported 1Q16 net income of SAR 33mn, +19% growth YoY beating

our estimates of SAR 31mn. Gross profit was SAR 67.2mn (+24% YoY, +33.5%

QoQ) and operating profit stood at SAR 35mn (+20% YoY, +4% QoQ).

Operating margin expanded to 13.8%, +80bps YoY. We highlighted margin

improvement potential for Care in our initiation report KSA Healthcare -

Prescription for long term growth and healthy returns (published on 14

October 2015) as the 200 new beds added at Riyadh National hospital

mature. We expect margins to further improve in coming quarters, and

forecast 15.8% operating margin in 2016, up from 12.4%/14.7% in 2014/15.



Revenues 254 16% 15% 241 5%


Gross margin 26.5%

EBIT 34.9 23% 4% 34.1 2%


Net Profit 33.0 19% -6% 34 31 -3% 6%




Slower growth compared to peers

Unlike its peers, Care does not have aggressive growth plans. It is planning

to add 250 beds (150 new + 100 renovation) / 30 clinics in Riyadh National

Hospital in two phases, taking its total capacity from 620 beds/140 clinics to

770 beds/170 clinics. It expects to start building the first phase in 2Q16 and

second phase in 4Q17. Beyond this, the company has not announced any

further bed capacity addition in the medium-term, unlike Dallah, Mouwasat

and Al Hammadi. The six-year CAGR (2014-20) bed capacity growth for Care

is only 3.7%, much lower than 14.4%/15.8%/28.1% for Dallah, Mouwasat

and Hammadi, respectively. Lack of new capacity additions beyond

renovation and expansion at Riyadh National Hospital implies weaker

earnings growth potential for the company over the longer-term.

Increase target price to SAR 55 (from SAR 50) and downgrade to “Sell” rating

on share price run

We see higher revenue growth and stronger margins post strong 1Q and

accordingly revise up our 2016/17/18 net income estimates by 3%/4%6% and

increase our DCF based target price to SAR 55 from SAR 50. We downgrade

the stock to Sell from Buy rating on share price run. Care trades at 19.0x EPS

(2016e) and offers 9.7% five year (2015-20) CAGR EPS growth.


25

National Medical Care Co. Financials



2015A 2016E 2017E

Revenue 879 897 987




EBITDA 188 207 222



Net Interest Income 0 0 0

Tax (11) (12) (14)





2015A 2016E 2017E



Investments 0 0 0

Net Fixed Assets 654 659 668



Total Assets 1,413 1,376 1,435






Share Capital 449 449 449


Shareholders Funds 897 946 1,004




2015A 2016E 2017E




Working Capital Changes (25) (69) 16





Debt Raised/Repaid 50 (40) (20)

Dividend (70) (90) (99)


Cashflow from Financing (20) (130) (119)

Net Chg in Cash (58) (52) 59





2015A 2016E 2017E

EPS 2.91 3.09 3.49

EPS Growth (%) 40.4 6.1 13.0

Gross Margin (%) 25.1 25.1 24.6

EBITDA Margin (%) 21.4 23.1 22.5

EBITDA Growth (%) 32.8 10.0 7.4

Net Margin (%) 14.9 15.5 15.9

ROAE (%) 14.6 14.7 15.6

ROAA (%) 9.2 10.1 10.9

Debt/Equity (%) 24.4 18.9 15.8

Valuation Ratios

PER (x) 20.2 19.0 16.8

PBV (x) 2.9 2.8 2.6


EV/EBITDA (x) 14.8 13.4 12.5



26

Price, Target Price and Rating Change History Chart of (Alhammad AB)

Price, Target Price and Rating Change History Chart of (Dallah AB)

Date Closing

Price

Target

Price Rating Initiation

13-Oct-15 88.11 100.0 A X

18-Feb-16 64.25 85.0 B

31-May-16 81.87 100.0 B

B

BA

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Mar-

14

Ap

r-14

May-1

4Ju

n-1

4Ju

l-1

4A

ug

-14

Sep

-14

Oct

-14

No

v-1

4D

ec-

14

Dec-

14

Jan

-15

Mar-

15

Mar-

15

Ap

r-15

May-1

5Ju

n-1

5Ju

l-1

5A

ug

-15

Sep

-15

Oct

-15

No

v-1

5D

ec-

15

Jan

-16

Feb

-16

Mar-

16

Ap

r-16

May-1

6

B=Buy, A=Add, N=Neutral, R=Reduce, S=Sell, U/R =

Under Review

Closing Price Target Price


27

Price, Target Price and Rating Change History Chart of (MOUWASAT AB)

Date Closing

Price

Target


13-Oct-15 123.89 165.0 B X

18-Feb-16 105.89 140.0 B

31-May-16 130.47 150.0 B

Price, Target Price and Rating Change History Chart of (CARE AB)

Date Closing

Price

Target


13-Oct-15 58.51 65.00 A X

18-Feb-16 41.55 50.00 B

31-May-16 58.75 55.00 S

Price, Target Price and Rating Change History Chart of (MEH AB)

Date Closing

Price

Target


31-May-16 69.37 75.00 N X

B

B

B

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Ap

r-14

May-1

4Ju

n-1

4Ju

l-1

4A

ug

-14

Sep

-14

Oct

-14

No

v-1

4D

ec-

14

Jan

-15

Feb

-15

Mar-

15

Ap

r-15

May-1

5Ju

n-1

5Ju

l-1

5A

ug

-15

Sep

-15

Oct

-15

No

v-1

5D

ec-

15

Jan

-16

Feb

-16

Mar-

16

Ap

r-16

May-1

6


Under Review


B

A

S

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0Ja

n-1

4Feb

-14

Mar-

14

Ap

r-14

May-1

4Ju

n-1

4Ju

l-1

4A

ug

-14

Sep

-14

Oct

-14

No

v-1

4D

ec-

14

Jan

-15

Feb

-15

Mar-

15

Ap

r-15

May-1

5Ju

n-1

5Ju

l-1

5A

ug

-15

Sep

-15

Oct

-15

No

v-1

5D

ec-

15

Jan

-16

Feb

-16

Mar-

16

Ap

r-16

May-1

6


Under Review


N

60.0

65.0

70.0

75.0

80.0

30-M

ar-

16

04-A

pr-

16

09-A

pr-

16

14-A

pr-

16

19-A

pr-

16

24-A

pr-

16

29-A

pr-

16

04-M

ay-1

6

09-M

ay-1

6

14-M

ay-1

6

19-M

ay-1

6

24-M

ay-1

6

29-M

ay-1

6


Under Review



28

Securities & Investment Company BSC Analyst Stock Rating Definitions

Time horizon

Short term SICO Research issues a Short term outlook if the analyst feels that there are factors which might affect the

short-term performance of the stock during the immediate six months after issuing a rating.

This might be due to both quantitative and qualitative factors which the analyst think can affect the price

Performance in the short- term. Short term outlook can be different from the long term rating and

the estimated up side or down side from the current price based on the Target Price estimate for the company

Long term SICO Research’s Long-term rating is based on the Target Price target price (given below) calculated by the

analyst. The Target Price is arrived at using both fundamental and comparative valuation methods based on the detailed

Financial models developed by analysts incorporating current expectations and analyst's assumptions.

Target price for a stock is calculated one year forward from the valuation date

Recommendation (Short term)

Positive Analyst expect positive triggers in the short term which might affect current price positively (> 10%)

Neutral Analyst does not expect any short term triggers/events (+/- 10%)

Negative Analyst expect negative triggers in the short term which might affect current price adversely (< 10%)

Recommendation (Long term)

Buy If Risk profile is “High” Target price estimate offers 20%+ return from the current share price.

If Risk profile is “Normal” Target price estimate offers 15%+ return from the current share price.

Neutral If Risk profile is “High” Target Price estimate offers 0% to 20% return from the current share price.

If Risk profile is “Normal” Target Price estimate offers 5% to 15% return from the current share price

Sell If Risk profile is “High” Target price estimate offers less than 0% return from the current share price.

If Risk profile is “Normal” Target price estimate offers less than 5% return from the current share price.

Risk

High Stock volatility (360 days standard deviation) exceeds 2x of S&P GCC market volatility

Normal Stock volatility (360 days standard deviation) lower than 2x of S&P GCC market volatility


29

NOTES

Contact Details

BMB Centre, 1st Floor

P.O Box 1331,

Diplomatic Area Manama

Kingdom of Bahrain

Investment Research

[email protected]

Head of Research

Nishit Lakhotia, CFA, CAIA Tel: (Direct) +973 – 17515021

Brokerage

Fadhel Makhlooq Tel: (Direct): +973 – 17515202

Visit us at

www.sicobahrain.com

Disclaimer

This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to

buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness

and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. Nothing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any

related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related investments. The analyst(s) who is (are) responsible for producing the report certifies(y) that he (she) or any of their close relative have no beneficial ownership in the company’s

stock at the time of publishing the report. Any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Additional information on the contents of this report is available on request. Among stocks under our coverage, Ahli United Bank and National

Bank of Bahrain owns 11.9% and 12.5% respectively in SICO. SICO does market making in Aluminum Bahrain (ALBA) and Zain Bahrain’s shares.

Copyright Notice

© Securities and Investment Company 2016. This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part.

mailto:[email protected]

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