Equity Analysis /
Egypt

Cleopatra Hospitals Group: 1Q19 – Positive news on expansion plans; margins to strengthen

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    11 June 2019

    1Q19 results

    • The original “Cleopatra Hospital” recorded over 40% in GPM, while the other hospitals recorded above 30%, reaching 35% in 1Q19.
    • Management noted that group GPM recorded 27-29% pre-acquisition, while it is currently operating at 37-38% on the back of increased prices, volumes and efficiency.
    • Management to launch a revenue cycle management framework that will improve claims collection procedure, following the impairment (+273% YoY) recorded from non-paying patients since 2016 and 2017. From 2Q19 onwards, management expects lower impairment charges as well as succeeding in retrieving some delinquencies.
    • Annual topline growth came on the back of a 12% YoY price increase (which matches Egypt’s inflation rate) as well as improved case-mix (+8% YoY), which resulted from revenue/service increasing for all business segments.
    • We have an Overweight recommendation with a FV of EGP6.23.

    Expansion plans

    • Management finalized the acquisition of Queens Hospital, which adds approximately 50 beds to CLHO’s current portfolio (total number of beds currently stands at 700 beds). Presently, management is in the phase of integrating and adding new services. Queens is expected to contribute to revenue starting from 3Q19.
    • Before the end of June 2019, management expects to launch its second polyclinic in West Cairo.
    • Management is a few days away from announcing the full acquisition of El-Katib Hospital (+100 beds). Management has owned the land and building since December 2018, however operations have yet to be under CLHO’s management. CLHO is currently awaiting the current operating company to finalize documentation as CLHO management finalized all regulatory approvals to conclude the acquisition deal.
    • Management acquired 4 floors in an adjacent building to El-Sherouq Hospital, which would allow management to shift its outpatient pharmacy and clinics from its old building to the new one; allowing an additional 20 beds to be installed. 
    • Nile Badrawi Hospital’s previous owner occupied 2 floors and has recently vacated the space. This will allow management to add 20 beds to its current roster.
    • Management is ahead of schedule in their 150 bed JV hospital with El-Nahda University (5%) in the Beni-Suef Governorate. Construction should start soon, with management expecting it to be added to its portfolio by FY20-end.

    FY19 capex & acquisition costs

    • Total FY19 capex and acquisition costs stands at approximately EGP600 million:
    • EGP25 million for Queens Hospital acquisition.
    • EGP60 million for Queens Hospital upgrades and renovation.
    • EGP200 million across all 4 organic hospitals.
    • EGP130-200 million for finalizing El-Katib Hospital acquisition and upgrading equipment.
    • EGP60 million for El-Sherouq expansion.
    • EGP60 million for Nile Badrawi expansion.

    Expectations

    • Management is expecting to record similar margins to FY18 on the back of integrating Queens & El Katib Hospitals and the second polyclinic to its current portfolio, which is expected to take some time to be fully-reflected and match current hospitals performance. FY19 is highly considered to be a transitional year, where management expects to get the best out of its current organic operations.
    • Management anticipates higher margins in FY2020 as a result of full integration of the newly-acquired projects as well as the inauguration of 2 new polyclinics (4 polyclinics in total by FY2020-end).
    • Management noted that the first half of every year normally delivers 45% of total year budget, whereas the second half of the year contributes to 55%. This is mainly due to lower volumes on the back of Ramadan and other feast vacations.
    • Management expects Queens & El-Katib Hospitals’ EBITDA to increase by 100% and 30%, respectively following price adjustments and upgrades by FY2020.