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06-Nov-2018

MEAHCO 3Q18 earnings plunge 69% Y-o-Y, mostly on cost pressures; significantly below EFGe

        Net income: SAR20.2mn, -69% Y-o-Y, -47% Q-o-Q,  -68% vs. EFGe
        Revenue: SAR338.8mn, -4% Y-o-Y, -2% Q-o-Q,  -7% vs. EFGe
        Gross profit: SAR111.9mn, -16% Y-o-Y, -4% Q-o-Q,  -24% vs. EFGe
        Operating profit: SAR21.3mn, -62% Y-o-Y, -45% Q-o-Q,  -68% vs. EFGe
 
Middle East Healthcare Co. (MEAHCO) reported another set of weak results, with 3Q18 earnings dropping 69% Y-o-Y (-47% sequentially) to SAR20.2mn, driven down by revenue slowdown, cost pressures and higher finance charges. Earnings came in 68% below our forecast. Revenue for 3Q18 fell 4% Y-o-Y, missing our forecast by 7%, which we believe was due to structural demand headwinds (population decline, etc.) and due to a lower number of outpatient visits, in addition to the relatively slow ramp-up at SGH Hail and Beverly Clinics in Jeddah. They key surprise was that margins were under fire, once again, pressured by: i) start-up costs related to Beverly Clinics (launched in Feb 2018); ii) higher staff costs on higher staff costs and the expat levy; and iii) SGH Hail (32%-owned, fully consolidated, c150 beds) launched in 1Q17 that likely remained loss-making in the quarter. The company recorded an all-time low gross margin of 33.0% narrowing c4.7pps Y-o-Y (vs. EFGe of 40.5%). Accordingly, gross profit dropped 16% Y-o-Y to SAR112mn, missing our estimate by 24%. EBIT margin contracted a sharper c12pps to 6.3% (EBIT -62% Y-o-Y, -68% vs. EFGe) as SG&A costs (inc. net other expenses) surged 17% Y-o-Y.   
 
We are disappointed by the results set, as the company had previously guided for improved performance (as MOH price list impact should have dissipated from 2Q18 and Hail hospital should have started seeing a pick-up in performance); 2Q18 was similarly weak, but the company had noted that margins were partly weak due to delayed consumable rebates (which do not appear to have supported this quarter’s results). We will be revising our numbers to reflect this results set. 
 
Middle East Healthcare co. (MEAHCO): SAR34.75 as of 05 Nov 2018, Rating: Buy, TP: SAR78.00/share, MCap: USD853mn, MEH AB/4009.SE
 
Nada Amin, Hatem Alaa