Equity Analysis /

Cleopatra Hospitals Group: Valuation update: Expansive strategy leads the way

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    21 October 2019

    Acquisition-driven valuation

    A market leader propelled by expansion plans, Cleopatra Hospitals Group (CLHO) is the prominent private hospital group in Egypt in terms of number of beds and facilities with an expected capacity of c800 beds in four organic hospitals, two polyclinics launched in 2019, a newly acquired 50-bed hospital and the acquisition finalisation of a 100-bed hospital. CLHO currently has a 46% market share among the top-10 large private hospitals in Cairo. Management’s key objective is expanding its geographical outreach as well as establish exceptional medical facilities to the untapped Egyptian market. Post-inauguration, CLHO has been steering towards organic optimisation and inorganic developments via expanding current facilities and acquiring low-utilized and inefficient hospitals.

    New assets to unlock upside potential

    With the acquisition of Queens Hospital and two polyclinics up & running, we updated our previous FV of EGP6.22 to EGP6.60 after rolling over our model for one year. We reiterate that factoring in other projects including Al-Sherouq and Nile Badrawi Hospitals extensions, acquisition of El-Katib Hospital, and Nahda Hospital JV will add EGP3.20 to our current FV to eventually reach EGP9.80. We note that we have yet to incorporate a FV for both the IVF center and a brownfield Hospital in New Cairo upon the completion of due diligence.

    High growth leads to low dividend payout; trading at premium to EM peers

    We believe the current expansive strategy will lead hospitals’ management to continue with the restrictive dividend policy to warrant the continuation of its expansion plan. On our floor/base case estimates, CLHO is currently trading at FY20f P/E of 21.2x and EV/EBITDA of 16.0x. CLHO is trading at a higher PE and EV/EBITDA vs EM peers median of 20.3x and 13.4x respectively, primarily due to offering the best exposure to the Egyptian healthcare sector.