• Solid fundamentals remain; Buy Dallah and Mouwasat We raise our FVs for the three hospitals we cover in Saudi Arabia to incorporate recently announced, better-priced contractual agreements and further capacity expansion at Mouwasat. We remain positive on sector fundamentals, driven by rising demand for private hospitals. Our top picks are Dallah (Buy, FV SAR103, 23% upside) which offers a 20%+ revenue and earnings five-year CAGR, driven by 650 new beds and 360 new clinics over 2016-19, with further upside risk from a new investment (30% of 308-bed hospital project, not included in our forecasts), and Mouwasat (Buy, FV SAR151.5, 17% upside) due to its strong earnings CAGR of 20% for 2016-21e on expansions (new c425 beds and 60 clinics over 2016-19), and higher margins and returns vs. peers. We reiterate our Neural rating on CARE (Neutral, FV SAR65, in line with current price).
• Trading in line with global peers despite stronger growth prospects The share prices of the three hospital companies dropped c7% on average over the past few days after reaching their 2016 highs post solid 2Q16 results and the announcement of better contractual agreements. Mouwasat’s share price is down 10% from its high (+3% YTD), CARE -9% (+16% YTD) and Dallah -6% (+16% YTD). Dallah trades at a 2017e P/E of c21x and Mouwasat at 23x broadly in line with global peers despite their higher earnings growth potential. We believe CARE (16x) is fairly priced at current multiples; CARE’s P/E discount to peers is justified by its lower growth potential in the medium- to long term vs. Dallah and Mouwasat.
• Expect robust 2016 earnings growth on revenue and margin We forecast average revenue growth of 15% for the three companies. We expect 14% revenue growth for Mouwasat, driven by: i) ramp-up in occupancy rate at Riyadh hospital; and ii) 114-bed additions (and 30 clinics) at Mouwasat Jubail hospital, which opened in May. Growth at CARE (+16% Y-o-Y) is supported by 200 bed additions in November 2013, expansion at new pharmaceutical and distribution units, new family care dispensary that opened recently, as well as new favourable contractual agreements with GOSI and Tawuniya Insurance. Dallah’s (+16%) revenue should be driven by the new clinics, launched in 2015, and better contractual terms with insurance companies. We expect robust clean earnings growth of 33% for Dallah, 19% for Mouwasat, and 30% for CARE. We expect EBITDA margin improvement to support further growth in earnings; we forecast it to expand 2.6pp for Dallah, 1.9pp for Mouwasat and 2.2pp for CARE.

Tarek El-Shawarby