18-May-2017
Saudi Healthcare: 1Q17 earnings normalise post exceptionally low 4Q16, payment of late government dues for some players
Mouwasat best performer operationally; CARE the worst
Mouwasat sustained its robust revenue and net profit growth; it remains one of our favoured plays operationally. Dallah’s strong earnings growth (+46%) was driven by lower SG&A expenses and provisions (including reversal of receivables provision); growth should improve as it starts operations at Dallah Namar (150 beds, trial operations in 2H17). CARE returned to profit post the 4Q16 loss, but earnings fell 53% Y-o-Y; our main concerns are: i) its margins are likely on a down trend to a new level post the change in pricing; and ii) it is likely in a transitional phase, given the recent change to temporary management. As for uncovered stocks, Hammadi’s operational recovery, post reopening of Olaya Hospital, reflected positively on earnings, while MEACHO’s performance was flattish. Our forecasts are under revision to reflect recent trends.
Mouwasat and Hammadi top revenue growth
Mouwasat and Hammadi were the only two listed hospitals that showed double-digit growth in revenue, helped by capacity expansions in Riyadh, and as Hammadi’s comparable quarter was affected negatively by the temporary closure of Olaya Hospital (from 7 Feb to 7 Aug 2016). Dallah booked single-digit revenue growth, unlike its stronger performance in previous quarters, while MEACHO’s revenue was flat. CARE was the worst performer, with a sharp decline in revenue (sustained trend since 3Q16) due to a downward adjustment to the pricing list of a major client in 1Q17; low pricing will be mitigated starting 2Q17 by a new SAR66mn one-year contract.
Margin recovers from 4Q16 trough; CARE misses estimate
The sector’s margins recovered Q-o-Q, as 4Q16 was affected negatively by exceptional provisions (partly due to settlement agreement over late dues from the government) and impairments. On a yearly basis, Dallah’s EBITDA margin (+6pp) expanded due to provision reversal and better efficiency post the restructuring of Dallah Pharma, while CARE’s margin (-5pp) remained under pressure, apparently affected by the reduction in its prices. Margins for Mouwasat and MEACHO were broadly stable Y-o-Y.
Better receivables collection notable at Dallah & MEACHO
Repayment of late government dues started to materialise, as announced by some players; this should improve the working capital cycle and free cash flow for the private healthcare sector, particularly for companies with high revenue/receivables exposure to government. For companies with low exposure, Dallah’s receivables DOH fell notably, while Mouwasat remained stable. As for those with high exposure, MEACHO’s DOH fell, while CARE remained on the high side.
Wafaa Baddour, CFA
Adham El Badrawy
Tarek El-Shawarby
Mouwasat sustained its robust revenue and net profit growth; it remains one of our favoured plays operationally. Dallah’s strong earnings growth (+46%) was driven by lower SG&A expenses and provisions (including reversal of receivables provision); growth should improve as it starts operations at Dallah Namar (150 beds, trial operations in 2H17). CARE returned to profit post the 4Q16 loss, but earnings fell 53% Y-o-Y; our main concerns are: i) its margins are likely on a down trend to a new level post the change in pricing; and ii) it is likely in a transitional phase, given the recent change to temporary management. As for uncovered stocks, Hammadi’s operational recovery, post reopening of Olaya Hospital, reflected positively on earnings, while MEACHO’s performance was flattish. Our forecasts are under revision to reflect recent trends.
Mouwasat and Hammadi top revenue growth
Mouwasat and Hammadi were the only two listed hospitals that showed double-digit growth in revenue, helped by capacity expansions in Riyadh, and as Hammadi’s comparable quarter was affected negatively by the temporary closure of Olaya Hospital (from 7 Feb to 7 Aug 2016). Dallah booked single-digit revenue growth, unlike its stronger performance in previous quarters, while MEACHO’s revenue was flat. CARE was the worst performer, with a sharp decline in revenue (sustained trend since 3Q16) due to a downward adjustment to the pricing list of a major client in 1Q17; low pricing will be mitigated starting 2Q17 by a new SAR66mn one-year contract.
Margin recovers from 4Q16 trough; CARE misses estimate
The sector’s margins recovered Q-o-Q, as 4Q16 was affected negatively by exceptional provisions (partly due to settlement agreement over late dues from the government) and impairments. On a yearly basis, Dallah’s EBITDA margin (+6pp) expanded due to provision reversal and better efficiency post the restructuring of Dallah Pharma, while CARE’s margin (-5pp) remained under pressure, apparently affected by the reduction in its prices. Margins for Mouwasat and MEACHO were broadly stable Y-o-Y.
Better receivables collection notable at Dallah & MEACHO
Repayment of late government dues started to materialise, as announced by some players; this should improve the working capital cycle and free cash flow for the private healthcare sector, particularly for companies with high revenue/receivables exposure to government. For companies with low exposure, Dallah’s receivables DOH fell notably, while Mouwasat remained stable. As for those with high exposure, MEACHO’s DOH fell, while CARE remained on the high side.
Wafaa Baddour, CFA
Adham El Badrawy
Tarek El-Shawarby