Earnings Report /
Saudi Arabia

Saudi German Hospital: Higher operating expenses drag net income

  • Revenue increased 1.3% yoy (+9.2% qoq) to SAR499mn and was in-line with our estimate

  • Gross profit remained flat yoy (+12.9% qoq) at SAR172mn and was in-line with our estimate

  • We believe, operating expenses growth was due to increased impairments related to accounts receivable

SNB Capital
7 November 2021
Published by

Saudi German reported a net profit of SAR14mn for Q3 21, down 58.9% yoy (+57.0% qoq). This is significantly below the SNB Capital and consensus estimates of SAR36mn and SAR33mn, respectively. Revenues increased by 1.3% yoy (+9.2% qoq) to SAR499mn and were in line with our estimates. We believe the weaker-than-expected result primarily came from higher operating expenses which may be due to higher accounts receivable impairments.

  • Revenue increased 1.3% yoy (+9.2% qoq) to SAR499mn and was in line with our estimate. The qoq growth in revenue reflects the normalization of business with one of the company’s primary insurance partners.

  • Gross profit remained flat yoy (+12.9% qoq) at SAR172mn and was in line with our estimate. Similarly, margins remained flat yoy (+111bps qoq) at 34.5%, also in line with our estimate.

  • In absolute terms, operating expenses increased by 14.8% yoy (+12.0% qoq) to SAR149mn vs SAR130mn in Q3 20 and SAR133mn in Q2 21. This compares with our estimate of SAR136mn. Consequently, opex-to-sales increased to 29.9% in Q3 21 vs 26.4% in Q3 20 and was higher than our estimate of 27.0%.

  • We believe, operating expenses growth was due to increased impairments related to accounts receivable. The company stated that its receivables stood at SAR384m at the end of Q3 21, against which it has made provisions amounting to SAR53mn.

  • As a result, despite flat revenue and gross profit on yoy basis, operating profit declined 44.7% yoy (+18.6% qoq) to SAR23mn, significantly lower than our estimate of SAR40mn. Consequently, operating margins contracted by c390bps yoy (+37bps qoq) to 4.7%.

  • Their Dammam facility continued to extend losses in Q3 21, as it reported a loss of more than SAR43mn in Q3 21 vs a loss of SAR46mn in Q3 20.

Outlook

We are Neutral on SGH with a PT of SAR39.8. We believe improved operating efficiency and the ramp-up of Al Dammam hospital are key stock catalysts. However, high accounts receivable remains a concern. The stock trades at 2021f PE of 30.6x, in line with the peer group average of 30.9x (excl. HMG).