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Cleopatra Hospitals Group: A strong kick-off for 2021

  • Solid revenue growth driven by favorable pricing despite a strong comparable quarter
  • Margins expand on long-term efficiency enhancement strategy
  • A strong 1Q21 paves the way for a better 2021

Solid revenue growth driven by favorable pricing despite a strong comparable quarter

CLHO reported solid 1Q21 revenues of EGP633 million, compared to EGP503 million in 1Q20, and compared to EGP611 million in 4Q20; showing an increase of 25.9% YoY and 3.7% QoQ. Solid annual performance came despite a strong comparable quarter that included only minor impacts to patient volumes and operations related to covid-19 pandemic. Revenue growth continues to be driven by optimized case mix, favorable pricing across all business segments as well as strong cross asset referrals. Volumes continues to gradually normalize during 1Q21, where CHG served 243,992 patients during 1Q21, which is slightly (1.3%) lower than 1Q20 levels of 247,243 patients.

During 1Q21, CLHO was able to grow revenues sequentially and annually due to a favorable case mix as well as a higher average revenue per patient (+27.6% YoY); fueled by higher average revenue per patient for inpatient, ER and catheterizations, which is mainly due to CLHO’s enhanced service offering, which factors in more complex surgical procedures, other value added services and the Group’s covid-19 treatment facilities.

On a by service basis, inpatient services  recorded the largest contribution continued to total revenues, standing at 27% of CHG’s revenues and recording an increase of 39% YoY in 1Q21, partially driven by Covid-19 treatment hospitals (AlKatib and Queens) with most patients visiting the two facilities requiring inpatient care. Surgeries revenues grew by 1% YoY with contribution to total revenues standing at 17% in 1Q21, primarily driven by an increasingly optimized case mix, favorable pricing and increasing utilization rates. The Group’s laboratory services grew by 59% YoY in revenues during 1Q21, contributing to 12% of consolidated top-line for the period (+3pps YoY), confirming the group’s diversification strategy through focusing on developing the Group’s other revenue streams including diagnostics, pharmacy, and polyclinics. Outpatient revenues grew by 9% YoY and contributed to 10% of consolidated revenues in 1Q21, driven by a 3.6% YoY increase in volumes. The radiology segment saw revenues more than double YoY with the segment’s contribution to top-line reaching 8% in 1Q2021 (+3pps YoY). Revenues from catheterization services increased 11.9% YoY, contributing 8% of total revenues stood at 8% for the quarter. Finally, the Group’s outpatient pharmacy services contributed to 4% of consolidated revenue for 1Q21, recording an 87% YoY increase in revenues in 1Q21.

Covid-19 treatment facilities’ revenues drive revenue growth, leading to lower contributions from other more established facilities

During 1Q21,  on a per hospital basis, El-Katib Hospital (covid-19 treatment facility) showed significant annual growth of 75% YoY and an increase of 5% QoQ, recording EGP42 million of revenues in 1Q21, contributing 6.0% to total revenues.

Cleopatra Hospital (includes revenues generated by Queens Hospital –covid-19 treatment facility-, recorded a YoY increase of 32% in revenues in 1Q21, contributing 42% to consolidated top-line. More specifically, Cleopatra Hospital recorded a 9% YoY increase in revenues, meanwhile, revenues from Queens Hospital recorded EGP48.6 million in 1Q21, compared to EGP1.5 million in 1Q20, on the back of being transformed to a covid-19 facility since May 2020.

CHG’s East and West Cairo Polyclinics contributed to 3% of total revenues in 1Q21, with revenues recording EGP26 million (+116.7% YoY, +8.3% QoQ). The IVF venture, Bedaya, contributed to 1.6% of consolidated revenues in the first quarter of the year, despite the Group only taking over operations in 4Q2020.

Margins expand on long-term efficiency enhancement strategy

Gross profit came in at EGP241 million in 1Q21, compared to EGP171 million in 1Q20, and compared to EGP236 million in 4Q20; a significant increase of 40.9% YoY and growing sequentially by 2.3% QoQ; implying a GPM of 38.1% in 1Q21 (+4.0pps YoY, -0.5pps QoQ). This can be attributed to CHG’s long-term efficiency enhancement strategy and management’s cost reduction and optimization efforts introduced over the last year, resulting in faster revenue growth (+25.9% YoY) than COGS growth (18.2% YoY).

During 1Q21, the Group recorded a decline in salaries and wages as percentage of sales (16% as percentage of sales, -2pps YoY, driven by efficiency enhancements across the group’s operations in spite of the addition of new facilities, while also witnessing a decline in its consulting fees as percentage of sales (15% as percentage of sales, -2pps YoY) on the back of an increasingly diverse and optimized service mix, leading to total COGS/sales ratio standing at 62% in 1Q21, significantly lower than the 66% ratio recorded in 1Q20.

Cleopatra Hospital, which continues to include Queens Hospital’s results, made up just over half of the Group’s consolidated gross profit for the year, Cleopatra Hospital (excluding Queens) made up around 40% of total gross profit for the quarter, while Queens' contribution to gross profit stood at 11% in 1Q21. CSH contributed 15% of consolidated profit, followed by NBH and ASH, each contributing 12% to the total gross profit for the quarter. El-Katib Hospital's contribution to gross profit stood at 7% in 1Q21, with an impressive GPM of 41%.

Adjusted EBITDA, factoring out acquisition expenses, impairments, provisions, the LTIP’s noncash charge, pre-operating expenses and contributions from other income, recorded EGP200.1 million in 1Q21, surging by 46.5% YoY and slightly increasing by 2.7% QoQ, implying a margin expansion of 4.4pps YoY and a margin contraction of 0.3pps QoQ, mirroring GPM performance and standing at 31.6% in 1Q21.

Bottom-line performance mirrors revenue growth, driven by margin expansion, despite higher depreciation and lower interest income

CHG recorded net attributable profit of EGP101.3 million in 1Q21, compared to EGP82.1 million in 1Q20, and compared to 107.7 million in 4Q20, an increase of 23.4% YoY and a decline of 5.9% QoQ, this came slightly higher than our estimate of EGP92 million in 1Q21. NPM stood at 16.0% YoY (-0.3pps YoY, -1.6pps QoQ). Annual bottom line performance mirrored revenue growth on the back of a 4pps YoY operating margins expansion that managed to offset a 35.2% increase in depreciation along with a drop of 62.6% in net interest income in 1Q21, primarily attributed to multiple rate cuts by CBE throughout 2020.

On the potential Alex Medical acquisition

  • On 17 May 2021, CHG filed for regulatory approval to launch a mandatory tender offer (MTO) for 100% of the outstanding shares of Alexandria Medical Services S.A.E. Alex Medical is one of the leading private hospitals in Alexandria with a capacity of around 300 beds and offering tertiary medical services, including a liver transplant unit, an oncology unit, and a kidney transplant unit.

  • CLHO is looking to acquire 100% of AMES, in a transaction that would value the company at EGP550 mn. CLHO has offered to purchase 14.27 mn shares at EGP38.53/share. This comes as part of CHG's expansion plan and strategy to target cities and facilities that address a clear supply-demand gap. CHG intends to continue investing in developing Alexandria's largest hospital along with growing bed capacity in the city.

Management Outlook for 2021

  • CHG focus is the normal business development plans, capturing attractive mergers and acquisition opportunities; mostly what CHG didn’t achieve in 2020.

  • Targeting revenue growth of 25-30% YoY, coming from organic growth, polyclinics and the IVF center.

  • Continuing with the same strategy of volumes and price growth, a favorable case mix and creating centers of excellence.

  • Given a weak base in 2Q20, management expects around 10% growth in volumes in 2021.

  • Al-Katib and Queens will keep operating as Covid facilities, since there is still currently high demand. After that Queens should operate as a center of excellence for oncology and Al-Katib will go back to be a general hospital, which will not require the pause in operations that Queens might require but will not impact the consolidated revenue growth guidance.

  • On the margins side,  CHG continues to focus on achieving efficiency and margins improvements.

  • During 2021, capex will be directed to electromechanical upgrades and renovations. This should be followed by lower capex spending in the following years.

Pharos 2021 earnings expectations

We expect CLHO to record a 2021 net attributable profit of EGP363 million, a growth of 26.5% YoY, implying NPM of 14.7% (+0.2pps YoY). This should be driven by solid revenue growth of 24.2% in 2021 along with 0.7pps GPM expansion to reach 35.4% on the back of diversified revenue streams, recovering volumes, improved utilizations and an increasingly optimized case mix, according to our estimates.

A Strong 1Q21 paves the way for a better 2021; Maintain Overweight

We expect CLHO to show a solid 2021, driven by patients volumes gradual normalization and returning back to normal levels, reflecting management successful strategy to focus on its long-term strategic objectives and continuous efforts to tailor the company’s business model to weather transitionally challenges.

CLHO is currently trading at 2021f P/E of 17.4x and EV/EBITDA of 10.2x, which is at a significant discount to its 3yr average P/E of 30.8x.

We are currently working on a detailed valuation update exercise that will include a detailed breakdown of key assumptions and will issue in due course.


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