Minimal sequential sales drop vs enhanced annual performance
CLHO reported 2Q19 revenues of EGP409 million, down 2% QoQ and up 25% YoY. Annual improvement came on the back of higher volumes (15% YoY) as well as improved case-mix (4.9% YoY). Most business segments witnessed higher volumes, except for ‘Catheterizations’ (CAT) which witnessed a 7% YoY drop. However, the drop was compensated by improved signs of efficiency (revenue/CAT +2% YoY). Management noted that the number of patients served increased to 232,000 patients (+14% YoY) as well as increasing cases served by 7% YoY. On the other hand, sequential drop resulted from lower volumes (-2% QoQ) and an almost flat price-mix drop (-0.9% QoQ). We believe this could be attributed to the usual seasonal dip witnessed during Ramadan in 2Q19.
CLHO also reported 1H19 revenues of EGP825 million, up 22% YoY. Annual enhancement was supported by higher overall volumes (7% YoY) in addition to better case-mix (10% YoY). Similar to 2Q19 segment performance, most segments recorded higher volumes except for ‘ER’ (-3% YoY). Despite the fall in ER volumes, segment continues to show signs of higher utilization (+13% YoY).
Increased non-recurring items trim EBITDA margin
On a quarterly basis, sequential GPM contraction (-5.1pps QoQ) resulted from increased cost pressure (+6% QoQ) vs sales drop (-2% QoQ). Despite annual sales growing by 25% YoY, annual GPM witnessed a negative yet almost flat drop (-0.4pps YoY) on the back of increased cost pressures (+26% YoY) vs lower sales growth: 1) ‘other expenses’ increasing by 134% YoY, 2) wages increasing by 24% YoY, 3) medical supplies expenses increasing by 19% YoY, and 4) consulting physicians increasing by 17% YoY. GP pressure continued to pull down both sequential EBITDA & NP margins. As for annual margins, EBITDA margin was trimmed to 13.2% vs 25.0% in 2Q18 as a result of G&A expenses surging by 168% YoY: 1) wages increasing by 119% YoY, driven by to CLHO’s Long-Term Incentive Program (LTIP) of EGP31 million, and 2) trade receivable impairment recording EGP9.5 million. If normalized (removing impairment and LTIP impact), 2Q19 EBITDA margin would record 23%. CLHO booked lower impairment in 2Q19 vs EGP31.7 million in 1Q19, which could indicate lower figures in the coming periods. Management attributed this to the improvement of the company’s collection procedure. EBITDA drop trickled down to lower 2Q19 attributable NPM to 10.7% vs 21.8% in 2Q18.
On an annual basis, 1H19 GPM recorded 34.5% vs 33.1% in 1H18 due to revenue growth exceeding COGS growth (20% YoY). EBITDA margin trimmed to record 15.1% vs 23.0% in 1H18 as a result of increased G&A expenses (+114% YoY). Despite net interest balance increasing by 25% YoY, 1H19 EBITDA margin pressure trickled down to further pull-down NPM to record 11.8% vs 18.5% in 1H18.
Expansions on a threshold; awaiting Alpha
With the second polyclinic up & running since July 2019 as well as integrating Queens Hospital in CLHO’s portfolio since mid-March19, we have maintained our base case FV of EGP6.23. Other projects including the potential expansion of Al-Sherouq Hospital, extension of Nile Badrawi Hospital, the acquisition of El-Katib Hospital, and the Nahda Hospital JV will add EGP2.75 to our base case FV to eventually reach EGP8.96. We note that we have yet to incorporate a FV for the IVF center recently acquired by management as we will be in contact with management to obtain more information.
We reported in our 1Q19 results note that management recently acquired four floors in an adjacent building to Al Sherouq Hospital, which should support inpatient & outpatient capacity growth in the coming period. Management noted that plans to extend Nile Badrawi will be in management’s sights following the vacated premise left by the previous owner, who used to occupy 2 floors. Regarding the finalization of El-Katib Hospital acquisition, management announced that it has completed the business transfer agreement (BTA) in August 2019, pending final approvals. CLHO also announced that its JV with Nahda University and Taaleem for Management Services to develop a 150-bed hospital (Nahda Hospital) will initially cost EGP360 million. We’re expecting the hospital to be up-and-running by FY21. It was also reported in June 2019 that management announced an exclusivity binding agreement of an In-Vitro Fertilizer center, which is expected to be finalized by FY19-end.
1H19 capex totaled EGP113 million, up by 290% YoY. Capex surge indicates management’s efforts to enhance its newly acquired facilities such as Queens as well as maintaining organic facilities’ high standards.
Abraaj has successfully transferred its EM funds - Abraaj Private Equity Fund IV (APEF IV) and Abraaj North Africa Fund (ANAF II) - to Actis and RMBV, respectively. Both Abraaj funds held an indirect stake in CLHO via shareholder Care Healthcare Ltd (42.5% and 30% stake respectively). Care Healthcare Ltd lowered its stake in CLHO from 69.4% to 37.9%. This indirectly lowers Abraaj’s stake, which we believe enhanced the stock’s liquidity during the previous weeks.
CLHO is trading at EV/EBITDA19 of 18.9x and P/E19 of 25.4x, above the market average of 13.4x and 21.1x, respectively. CLHO is trading at a premium to peers, primarily due to offering the best exposure to the Egyptian healthcare sector.