• Solid fundamentals remain; Buy Mouwasat, Dallah and CARE We cut our FVs for the three hospitals we cover in Saudi Arabia, mainly to reflect higher cost of equity led by higher risk free rate and to incorporate recently-announced expansions and delays to some capacity additions. We maintain our positive outlook on sector fundamentals as: i) demand for healthcare services is largely intact; and ii) private hospitals are not dependent on government finance. Our top picks remain: i) Mouwasat (Buy, FV SAR135, 18% upside); strong earnings CAGR of 18% for 2016-21 on expansions (new 440 beds and 90 clinics over 2015-19), and higher margins and returns versus peers; and ii) Dallah (Buy, FV SAR90, 36% upside) offers 23% earnings CAGR driven by 650 new beds and 360 new clinics over 2016-19, with further upside risk from new investment (30% of 308-bed hospital project, not included in our forecasts). We upgrade CARE (Buy, SAR53.5, 28% upside) to Buy from Neutral; the stock price offers an attractive entry point post its significant correction.
• Compelling valuation after sell-off; expect some momentum The share prices of Saudi hospitals under our coverage have corrected 15% on average YTD, in line with the market sell-off after the government announcement of cuts in spending and ease in fuel subsidy in late-2015. Also, there is a likelihood that investors are exiting some names in preparation for the upcoming listing of Middle East Healthcare Co. (MEAHCO), in our view. CARE witnessed the biggest plunge (-26% YTD) despite boasting solid results in 2015 (earnings up 37%). Mouwasat followed (-10% YTD) then Dallah (-9% YTD), but both have rebounded in recent weeks. Current multiples are compelling, in our view; the sector trades at a 2016e P/E of 18.8x, below its two-year average historical multiple (30.7x). Dallah and Mouwasat trade at an average P/E level of c22.6x in 2016e, slightly above global peers (22.0x) offering higher margins, while CARE is trading at a deep discount (2016e P/E of c13.0x), given its lower growth potential versus local peers.
• Expect solid revenue and earnings growth in 2016 on expansions We forecast average revenue growth of 15% for the three companies. We expect 16% revenue growth for Mouwasat, driven by: i) ramp-up in the occupancy rate at Riyadh hospital; and ii) new 114-bed additions at Mouwasat Jubail hospital (expected by early 2016). Growth at CARE (+15% Y-o-Y) is supported by 200 bed additions in November 2013, expansion at new pharmaceutical and distribution units, and the new family care dispensary that opened recently. Dallah (+15%) will benefit from higher utilisation from the new paediatric building that opened in 4Q2013 and new clinics launched in 2015. We expect robust clean earnings growth of 21% for Mouwasat (coming from a low base), 11% for CARE (versus 37% Y-o-Y in 2015) and 13% for Dallah.

Tarek El-Shawarby