We resume coverage on Mouwasat with an Overweight rating and PT of SAR96.8. Mouwasat is the only listed Saudi healthcare company that posted net income growth in 2018. Even though the sector is impacted by issues from the expat exodus, overdue accounts receivables and the expat levy, we think the company is largely immune to these factors. We believe, the company is set to benefit from a strong expansion pipeline, favourable client mix and its presence in the lucrative Eastern province. We expect the company to deliver strong revenue and net income growth at a CAGR of 11.4% and 13.0%, respectively during 2018-23f. Our implied 2019f P/E of 24.7x implies a 31% premium over the peer group average of 18.8x, which is justified in our view given its resilient margins.
Strong expansion pipeline key driver of volumes
Mouwasat has strong expansion plans with two brownfield projects underway in Dammam (completion Q3 20) and Madinah (completion Q4 20) and one greenfield project in Yanbu. The Dammam and Madinah projects are expected to increase Mouwasat’s bed capacity by 23% to 1,403 from 1,139 currently. We expect utilisation rate to decline from 2019 to 2021 due to the new openings and pick up thereafter. Furthermore, dominance in the lucrative Eastern province, a favourable client mix (c60% revenues coming from insurance clients, c16% from corporates) and better contractual terms with clients helped the company record growth in patient volumes and revenues in 2018. In contrast, other players face issues such as declining patient volumes, weaker contractual terms and slower ramp-up of new projects. We forecast revenues to grow at a CAGR of 11.4% in 2018-23f driven by expansion coming online and an increase in revenue per patient.
Cost management and short cash cycle support ROE
Mouwasat’s gross margin remains the highest in the sector at 43.3% in 2018. This reflects better pricing terms with insurance clients (given multiple accreditations of its hospitals) and efficient management of salary costs. We believe salary cost per employee has consistently been lower than that of its rival. Separately, Mouwasat’s receivables jumped 88% to SAR655mn in 2018, but this was mostly due to impact from IFRS 9 and IFRS 15. Cash cycle remains one of the best in the industry at 110 days given strong receivables management and low exposure to MoH business at c14%. This compares with 219 days for Care, 212 days for SGH and 151 days for AlHammadi.
Net income to grow 9.1% in 2019f and at a CAGR of 13.0% in 2018-23f
We forecast net income to grow 9.1% to SAR393mn in 2019f driven by strong volume growth as operations ramp-up in Khobar, Damman and Medinah. However, margins are expected to decline given pre-operating expense related to expansions. We forecast net income to grow at a CAGR of 13.0% in 2018-23f to reach SAR665mn by 2023f.
Strong potential upside and dividend payout
We are Overweight on the stock with a PT of SAR96.8 reflecting a 16.7% potential upside. The stock is trading at a 2019f and 2020f P/E of 21.18x and 19.7x, significantly below its five-year average of 25.7x. Our implied 2019f P/E of 24.7x implies a 31% premium over peer group average of 18.8x is justified in our view given resilient margins. We expect dividend yield to grow from 2.4% in 2019f to 4.8% by 2023f.