ISPH breaks into hospital business in an opportunistic move
ISPH signed a contract to acquire El Shorouk Hospital (105 beds), a brownfield hospital located at Shorouk city. The acquisition was concluded at a total consideration of EGP430 mn (this includes settlement of receivables due to ISPH of EGP230 mn), with the remaining amount of EGP200 mn paid in cash. The acquisition value includes the hospital’s real estate and operational assets. Management expects the hospital to be operational by the end of this year and noted that the hospital is expected to generate a lot of synergies and operational efficiencies.
At such valuation, and given that the seller of the hospital is ISPH’s client and agreed that a portion (around 53.4%) of the transaction value is settled through canceling receivables due to ISPH; we believe that the transaction is an opportunistic move and comes in at an extremely attractive valuation.
Management noted that the capex needed for the hospital over the coming 2 years is around EGP50.0 million.
We believe that the hospital will follow a premium pricing strategy, given its location; this would imply NPM in the range of 20-25% after one year of operations.
Assuming revenue per bed of EGP2.0-3.0 mn, at a 100% utilization rate, this translates into hospital revenues of EGP210-315 mn (0.8%-1.2% of ISPH’s 2022 revenues pre-inclusion of the hospital. At a NPM of 20-25%, this translates into net profits of EGP47.2-70.8 million (this could represents 12% and 17% of ISPH 2022 net profit pre-inclusion of the hospital).
We believe that the valuation is very attractive compared to CLHO, given that:
CLHO is trading at a market cap to a number of beds of EGP9.3 million per bed (assuming a price of EGP4.68 (average 3M), a market cap of EGP7.48 billion, and 801 beds).
this transaction implies a transaction value to number of beds of EGP4.1 million per bed, 56% lower than CLHO.
applying a 25% discount to CLHO’s value/bed, given CHG expertise in the market; this transaction could result in a relative valuation of EGP735 mn (a value of EGP7.0 million per bed), and accordingly adds a net of EGP305 mn after deducting the transaction value of EGP430 mn; this translates into EGP0.32 per ISPH share, and brings our ISPH FV to EGP4.82/share (offering a 112% upside potential).
Healthy 1Q22 retail pharma market growth
Retail pharma has partially recovered in 2021, which confirms the sustainability of the gradual sequential recovery expected in 2022. According to IQVIA, retail pharma sales recorded EGP86.45 billion in 2021, showing a modest of 7% YoY, according to the latest available data. Such YoY growth is higher than 2020 retail pharma market growth (+4% YoY growth) but is still below 2019 double-digit growth levels of c.17% YoY. In 1Q22, retail pharma sales grew by 13% YoY, reaching EGP22.2 bn; driven by a healthy volumes’ recovery (+7% YoY) and price increases. We expect 2022f retail pharma market sales to record EGP95.2 billion (+10.1% YoY), non-retail pharma market to record EGP48.0 billion (+13.4% YoY), and total pharma market sales to record EGP143.2 billion (11.2% YoY).
Muted annual revenue growth and weakening sequentially on unfavorable seasonality
ISPH reported 1Q22 net revenues of EGP5.33 billion (lower than our estimates of EGP5.72 bn), compared to EGP4.75 billion in 1Q21, and compared to EGP5.98 billion in 4Q21 (+12.1% YoY, -10.8% QoQ).
Annual increase is attributed to gradual pickups in revenues driven retail pharma market in 1Q22 (+13% YoY). However, quarterly weakness is driven by ISPH’s revenues seasonality that tend to increase towards the second half of the year (1H2019, 1H2020, and 1H2021 revenues represented less than 50% of the full year revenues at 45%, 34% and 46.6%, respectively).
During 1Q22, key revenue segments performance came as follows:
· Pharmacy sales (retail) (66.9% of gross sales, -0.4pps YoY, -4.4pps QoQ) showed an increase of 11.7% YoY and a decline of 13.7% QoQ.
· Wholesale sales (14.7% of gross sales, flat YoY, -0.9pps QoQ) grew by c.12.2% YoY and dropped by 13.1% QoQ.
· Tenders and Hospitals sales (17.5% of gross sales, flat YoY, 1.8pps QoQ) increased by c.12.5% YoY and 2.2% QoQ.
· Other revenues that include 3PL (0.8% of gross sales, +0.3pps YoY, +0.4pps QoQ), surged by 94.7% YoY and 77.9% QoQ.
GPM expands sequentially on a weak base effect
ISPH reported gross profit of EGP396 million in 1Q22, compared to EGP373 million in 1Q21, and compared to EGP371 million in 4Q21 (+6.1% YoY, +6.7% QoQ); implying a GPM 7.4% (-0.4pps YoY, +1.2pps QoQ). The quarterly expansion is driven by a weak base effect in 4Q21 that witnessed an unfavorable revenue mix, with higher wholesale segment sales contribution and weaker retail (high margin) sales contribution, where the wholesale segment witnesses customers receiving cash discounts in exchange for cash payments.
EBITDA mirrors GPM performance on opex control
During 1Q22, EBITDA stood at EGP209 (+2.9% YoY, +9.1% QoQ), mirroring gross profit performance. ISPH’s EBITDA margin stood at 3.9% in 1Q22 (-0.4pps YoY, +0.7pps QoQ). This is mainly attributed to the company almost flat SG&M to sales of 4.1% in 1Q22 (+0.1pps YoY, -0.6pps QoQ).
ISPH managed to benefit from economies of scale during 1Q22, where:
Revenue per site grew by 8.6% YoY, recording EGP82.0 million,
Revenue per vehicle grew by 10.9% YoY, standing at EGP7.0 million,
Revenue per employee registered EGP0.81 million , growing by 13.6% YoY.
Non-operating Expenses Caps Bottom-line Growth
Net profit came in at EGP59 million in 1Q22, below our estimates of EGP77 million, implying an increase of 17.9% YoY and a decline of 18.4% QoQ. This translates into a NPM of 1.11% in 1Q22 (+0.1pps YoY, -0.1pps QoQ).
During 1Q22, bottom-line performance is driven by:
muted revenue growth annually and weakening sequentially,
flat margin performance,
amortization expense of intangible assets of EGP16.1 million (compared to EGP0.45 mn in 1Q21),
other expenses of EGP15.0 mn (compared to EGP0.85 million in 1Q21)
where FX gains of EGP7.19 mn were not enough to offset higher non operating expenses.
ISPH hedged against market fluctuations; growth supported by optimistic retail market growth
ISPH is capturing opportunities in the retail and wholesale segments, hedging against market fluctuations and disruptions. Despite the wholesale segment generating pressure on GPM, because of the cash discounts given, it has a positive impact on opex because of the drop size; given that whenever the drop size is bigger, the lower the direct expense on this order. Accordingly, regardless of the revenue mix, the impact on the net profit is going to be minor, driven as well by an optimization strategy that would push both retail and wholesale associated costs down.
ISPH expects the retail market to grow close to 10-12% between 2022 and 2023, where ISPH plans to grow its retail business segment by 14-15% (compared to 8-9%); implying a gradual rebound of the retail segment over the wholesale segment.
Management 2022 Guidance:
Revenues are expected to grow by around 15%, in line with our estimate of EGP25.2 bn (+16% YoY)
GPM in the range of 7.7%, minimally higher than our estimate of 7.6%,
NPM in the range of 1.6-1.7%, in line with our estimate of 1.6%, translating into net profit of EGP407 mn (+29.2% YoY),
A new potential investment could take place over the course of 2022.
ISPH board declared distributing dividends of EGP0.10 per share (Payout ratio 35.6%, DY 4.4%) out of 2021 profits. Record date is on 05 June 2022 and Distribution date is on 08 June 2022.
ISPH is trading at 2022f P/E of 5.4x and EV/EBITDA of 3.9x.