• Revenue on track; 2016e earnings may slightly miss on margin Recurring earnings grew 3% Q-o-Q to EGP21mn in 3Q16, as revenue growth of 7% to EGP215mn was offset by a 1.4pp contraction in the EBITDA margin to 20.7%. Below EBIT, interest income on IPO proceeds is mitigating finance costs, until the proceeds are utilised. In 9M16, pro forma revenue and EBITDA growth was robust at 17% Y-o-Y. CHC is largely on track to achieve our full year revenue estimate, but its 9M16 EBITDA margin (22.8%) is below our 2016 target (25.9%), which puts slight downside risk to our recurring earnings estimate (EGP93mn vs. EGP62mn in 9M16). CHC plans to pass on inflationary pressure (EGP weakness & VAT); however, we expect to see quarterly fluctuations in margins in the short term until this process is completed.
• Cleopatra and CSH lead revenue growth; group EBITDA margin lower The three main contributing segments to revenue growth were outpatient clinics (+18% Q-o-Q), inpatients (+10%) and laboratory (+25%), while surgeries came in flattish (-3%). CSH witnessed the highest revenue growth (+11%, 21% of revenue) followed by Cleopatra (+7%, 44%) and ASH (+5%). The EBITDA margin softening Q-o-Q was driven chiefly by higher maintenance costs related to the restructuring of its hospitals. Consultant, medical staff, and medical consumables costs grew in line with sales, while SG&A-to-sales retreated as 2Q16 expenses were elevated by overtime rates during Ramadan. IPO-related expenses (EGP30.8mn) were netted from the IPO proceeds in 3Q16’s shareholders equity.
• Initiatives to increase patients flow to hospitals CHC is making new agreements with major insurers, including its largest client MetLife, to emphasise the one-stop-shop approach and increase patients flow to all hospitals. The rollout of this initiative will continue in 4Q16. CSH inaugurated a EGP22mn radiology centre, which will also help the hospital become a cardiac care centre of excellence. CHC is still studying buying CSH’s remaining shares as well as other opportunities to utilise the IPO proceeds.

Wafaa Baddour, CFA
Adham El Badrawy