• Trading below peer average despite bright growth outlook MEAHCO (MEH AB / 4009.SE), which uses the brand name Saudi German Hospital (SGH), is one of the largest (+780 beds) and most geographically diverse hospital networks in KSA (operating four hospitals). It is trading well below regional and global peers since listing this March. The share price has risen moderately recently on the back of the NTP announcement and has been seen as a laggard by the market. Last week MEAHCO saw significant foreign net inflows into the stock of USD8.5mn.
• Back-of-the-envelope analysis points to unwarranted discount to peers If we assume modest earnings growth of 3% in 2016 (flat in1Q16), it is trading at c17.0x 2016e P/E, which is below covered local (23.7x) and global (25.0x) peers despite expected solid results and growth from upcoming bed expansions (+c50% capacity) gradually starting this year, and being one of the most profitable with good returns. Its closest peer, CARE, trades at a 2016 P/E of 18.8x, and we believe MEAHCO warrants a premium given its superior returns, margins and growth prospects, but at a discount to Mouwasat (25.3x) and Dallah (27.2x) on concerns of increased levels of receivables from Ministry of Health (MoH). Our back-of-the-envelope analysis (using the average 2016e P/E for covered local peers) implies cSAR100/share.
• Growth supported by ST capacity expansion and solid market dynamics We believe double-digit earnings CAGR may be achievable on total expansions of 385 new beds and 197 clinics: i) 85 beds before end of 2016, 22 clinics opened in Jeddah and 40 clinics in 2017 for current hospitals; ii) 150 beds and 35 clinics in Hail before end of 2016; and ii) 150 beds and 100 clinics are planned by 2018 in Dammam. A rising population and lifestyle-related diseases, coupled with a shortage of beds, support its growth and creates attractive investment opportunities for the private healthcare sector. KSA has one of the lowest number of beds per 1,000 people (c2.2) among OECD countries (4.8).
• Rising levels of receivables associated with MoH is a key risk MEAHCO’s revenue is highly exposed to MoH (c30% of revenue) and receivables associated with MoH represent c60% of total receivables, hence future performance is contingent on: i) maintaining/renewing agreements with MoH; ii) maintaining referral volumes; and iii) maintaining profitable margins on MoH contracts. This exposes it to risks of delayed payment for referrals invoices by the MoH and changes in contract terms and pricing. An upside risk is an expected payment from the MoH in 2016. Another challenge is the shortage of skilled physicians; hence, high retention costs, as well as strict regulations for Saudisation and fees imposed on hiring expats.

Tarek El Shawarby