• Robust earnings growth driven by expansions; ahead of our estimates The three hospital companies under coverage saw robust Y-o-Y earnings growth of 10% on average in 1Q2016, driven by revenue surge. Mouwasat reported the strongest growth (+27%), followed by Dallah (+22%) and CARE (+19%). Top-line surge (Mouwasat +21%, Dallah +19% and care +16%) came on the back of ramp-up and accelerated utilisation of capacity additions, along with EBITDA margin improvement (Mouwasat +2 pp, Dallah 140 bps and CARE 90 bps). The earnings came in ahead of our estimate for the three companies, mainly Mouwasat (+16%) followed by Dallah and CARE (+c7%).
• Growth prospects intact with new expansions underway Our forecasts call for average revenue growth of 15% for the three companies in FY2016. We expect 16% revenue growth for Mouwasat, driven by: i) ramp-up in the occupancy rate at Riyadh hospital (175 beds added in 2015); and ii) new 100-bed additions at Mouwasat Jubail hospital (expected in 2Q2016). The new better-priced two-year contract with ARAMCO is a catalyst to our estimates. Dallah (+15%) will benefit from higher utilisation of its new clinics in 2015 (65 clinics). 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. 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.
• Reiterate Buy for Mouwasat and Dallah; reduce CARE to Neutral The share prices of the Saudi hospitals under our coverage have rallied 22% on average since our last update on 25 February 2016 (view full report) and have accelerated further post 1Q2016 results. We highlighted in our previous update that we expect some momentum on the healthcare, especially after reaching unjustifiable low multiples post market sell-off at that time. The sector currently trades at a 2016e P/E of 25.2x. Dallah and Mouwasat trade at an average P/E level of c25.4x in 2016e, almost in line with global peers (26.5x), although they offer higher margins. CARE is still trading at a discount (2016e P/E of 17x), given its lower growth potential versus local peers. Our FVs now offer limited upside for Mouwasat (+6%) and no upside for CARE (-3%). In our view, CARE is fairly priced at the current level; hence, we reduce it to Neutral. We keep our Buy rating for i) Mouwasat (despite the limited upside), as we will revisit our forecast post better-than-expected 1Q2016 results and new contract with ARAMCO; and ii) Dallah as there is still some upside to our FV (+11%).

Tarek El-Shawarby