• Share price does not reflect double-digit earnings growth forecast We initiate on Cleopatra Hospital Company (CHC), the largest private hospital group in Egypt, with a Buy rating and FV of EGP11.70 (incl. capital increase), implying 26% upside. The stock trades at a 2017e P/E (recurring) of 15x vs. regional peer average of 20x. CHC was created via the acquisition of four hospitals in 2014-1Q16. We expect potential synergies and restructuring to boost revenue (2016-20e CAGR of 16%), recurring earnings (28% CAGR) and recurring EBITDA margin (+3pp to 28% in 2020e). Use of IPO proceeds is the main catalyst to our valuation, while risks include inability to pass on higher costs due to EGP weakness, competition with several hospitals coming on-line in Cairo, and slow execution of the restructuring plan.
• Restructuring and synergies to unlock value CHC’s hospitals (624 beds) are located in prime areas in Cairo with well-known brands: Cleopatra, Cairo Specialized Hospital, Nile Badrawi Hospital, and Al Shorouk. The flagship hospital, Cleopatra, is seen as the role model, in terms of quality and profitability, that the other hospitals plan to emulate, helped by a recent change in their senior management and a EGP124mn restructuring plan for the hospitals (in 2016). The plan includes: i) standardising quality (seeking JCI accreditation); ii) centralising raw material procurement; ii) enhancing efficiency; i.e. shortening patients’ length of stay, increasing clinics’ working hours, and raising under-priced services; iii) creating one to two centres of excellence per hospital, while maintaining the general hospital set-up; and iv) extending its reach by launching polyclinics in new suburban areas.
• Use of proceeds a catalyst: adding capacity in underserved market Egypt has insufficient hospital beds, with 0.5 beds /1,000 people, and we estimate it needs to add over 2,000 beds annually just to maintain this ratio. To benefit from this CHC plans to use the IPO proceeds (EGP360mn), and support from improved leverage capacity, to expand its number of beds by 50% via acquiring a new hospital (negotiations in process, hospital built but not yet operational) in New Cairo (EGP300-350mn, 200 beds, 20 clinics) and setting up two extension buildings next to Cleopatra and Al Shorouk hospitals (EGP400mn, 140 beds, 12 clinics, awaiting licences and permits).

Wafaa Baddour, CFA
Tarek El-Shawarby
Ahmed Hazem Maher
Adham El Badrawy