With the need to improve healthcare and pharma services as a result of the increasing supply-demand gap, both CLHO and ISPH continue to demonstrate strong growth levels, higher efficiencies, which results in higher margins and continuous market share growth.
Cleopatra Hospital Group (FV: EGP6.23, OW)
- FY19 was a solid kick-start for CLHO’s expansion projects: Queens Hospital, El-Katib Hospital, In-Vitro Fertilization Centre, and 2 polyclinics. Management will be looking towards integrating these projects to its current portfolio, so that full integration could be finalized by FY20 and therefore reflect higher margins.
- All 4 new expansions projects (2 new polyclinics, Queens & El-Katib Hospitals and the In-Vitro Center) will be internally financed via its current cash balance. Management might fall back on a capital increase or debt in FY20 or FY21, depending on the cost.
- The main purpose of the polyclinics is not revenue contribution or margin enhancement, but the strategic feeder network of patients to CLHO’s main hospitals.
- CLHO inaugurated its first polyclinic in East Cairo in Feb19. 1Q19 results did not include its performance since it was still under commissioning. Management noted that its operations should start to reflect on financial statements by 2Q19. However, it is stressed that the first year of operations will not fully reflect the polyclinics’ optimal performance.
- Management is satisfied with the number of patients, however they are impressed with the increased levels of utilization (50-60% of patients are referred to group hospitals).
- The second polyclinic will be inaugurated in 3Q19.
- Revenue per site is expected to contribute to EGP30-70 million across the coming 3-4 years.
- Revenue per patient could potentially record EGP1,000.
- CLHO acquired the operations of the maternity hospital in the Heliopolis area. Before new ownership, the hospital ran on low utilization and low efficiency levels where there no ICU and ER cases.
- The acquisition was finalized on March 17, 2019. Therefore, 1Q19 results reflected only 13 days of operations.
- CLHO will be adding new services as well as integrating the hospital to its current roster.
- Transaction cost stood at EGP25 million (approximately 5x EBITDA) as management has only acquired the operations, not the building (agreed to lease the building for the coming 18 years, with an advanced payment of EGP4-5 million). Management will try to acquire the building in the future.
- Capex of EGP40 million will be spent to acquire new equipment.
- It is a 90-bed hospital, potentially increasing to 108 beds (built but not licensed).
- Management successfully finalized the real estate and land acquisition in December 2018 for an amount of EGP143 million. IFA valuation stood at EGP266 million, with management expecting to finalize the business transfer agreement at around EGP130-150 million.
- Management is still in negotiations to finalize the business transfer agreement, however we can expect some important updates in the coming period regarding this matter.
- Current pricing is slightly lower to Nile Badrawi (EBITDA margin of early 30’s); expected to increase in the coming years to ensure higher margins.
- EGP30-40 million will be spent on new medical equipment capex.
- Expected to record an EBITDA of EGP30-35 million in FY19, expected to start continuing to earnings by 3Q19. EBITDA margin is currently running on an early 20’s, expected to follow the upward trend of other hospitals in the coming period.
- Management is ahead of schedule in their 150 bed JV hospital with El‐Nahda University (5%) in the Beni-Suef Governorate. New under-served market, good purchasing power and already-constructed building shell.
- Management finalized the schematic designs and is expected to be finalized in 18 months.
- Expected investment stands at EGP300-350 million.
- Management is currently in negotiations to acquire a 200-bed hospital in the outskirts of Cairo.
- Management expects to announce the conclusion of this deal by FY19-end, where it is expected to be operational within 2 years after the acquisition.
- Management announced an exclusivity binding agreement of an In-Vitro Fertilizer center.
- Management expects an EBITDA margin contribution of more than 40%. Currently, it is reporting approximately EGP40 million.
- Current owners presently have one center, will be adding an additional one by the time the transaction is completed.
- Management expects to add further centers post-acquisition.
- Management is expected to close the transaction for an EV/EBITDA of 8-10x.
El Sherouq Hospital Extension
- 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 for an additional 20 beds to be installed.
Nile Badrawi Hospital Extension
- The previous owner occupied 2 floors and has recently vacated the space. This will allow management to add 20 beds to its current roster.
Organic FY19 Expectation
- 20% YoY growth in revenues organically, since the price increase implemented in FY19 was lower than that of FY18.
- 1-2pps increase for margins across the board, compared to the previous year.
Consolidated FY19 Expectation
- The 1-2pps improvement in margins from the organic hospitals will be diluted with the integration of the new projects (2 new polyclinics, Queens & El-Katib Hospitals).
- Expected to record a GPM 35%, with an EBITDA margin of 25%.
Ibnsina Pharma (FV: EGP13.50, OW)
- The historical pharmaceutical market recorded a normalized rate of 14%, of which 4% is volume growth while ASP grew by 10% in the past 5 years.
- FY18 pharmaceutical market grew by 24% YoY (beating management expectations), of which 9% was volume-driven while the remaining 15% was price-driven. FY18 price growth was mainly due to pharma-manufacturers registering new products with higher prices (no price-hike adjustments implemented by the Ministry of Health in FY18).
- Management provided guidance on pharmaceutical market growth of 15% YoY, despite 1Q19 market growth recording 23.5% YoY. Management expects the market to grow by 50% in the next 3-4 years.
- Egyptians consume an average of 2 boxes of medicine per month, each priced at USD3 (relatively cheap compared to global med prices).
- Management believes medicine production is showing much greater stability to previous years, despite the drop in market volumes in 2017 due to pharma-manufacturers lowering production as well as retailers stockpiling large inventories in anticipation of a price hike that was announced in 4Q16. Management noted that the Ministry of Health has taken note and will not be announcing price-hike plans to avoid such obstacles in the future.
- With the pharma market growing at 24% YoY in FY18, all top 3 market players have gained further market share. On the other hand, the small players (‘others’, currently at 41%) lose a yearly average of 2 pps in market share to those big players. Of that 41%, 30% are small distributors with one distribution center in one location.
- Competition among the big players has shifted the focus of operations to be more towards service-edged (increased number of deliveries & rare-item availability) versus price-edged in the past.
- Management prefers to have price over volume increases as any volume increase translates into a cost trigger.
- Management stresses the importance to match market segments growth. Currently, ISPH’s retail sales constitute 70% of total sales, similar to that of total market sales.
- Historically, EgyDrug (a state-owned distributing company) held exclusive rights to distribute government-owned pharma manufacturers’ products (which constitute 5% of total market share) as well as having the privilege of a lower price in pharma tenders. Recently, management has witnessed a change where government-owned manufactures have started contracting ISPH to distribute their products as a result of EgyDrug operating at a loss (-EGP280 million).
- 1Q19 results demonstrated a slight shift in the sales composition where tender sales (credit-based sales) increased by 57% YoY and constituted 11.6% of total 1Q19 sales vs 9.5% in 1Q18. On the other hand, wholesale sales fell to 12.1% of total 1Q19 sales vs 15.0% in 1Q18. Going forward, management expects FY19 sales composition to normalize to FY18 levels (14-15% for wholesale and 12-13% in tender sales).
- Tender sales have higher margins compared to other business segments because of a higher drop-size, which results in lower opex. Pharmacy sales continue to be the core business segment, however solidification of ‘big size’ (wholesale and tender) segments is essential for continued growth and improved margins.
- The first quarter of every year is usually the lowest amongst the other quarters mainly due to salary adjustments, which constitutes around 60% of total COGS. Management does not expect to increase salary following the July19 subsidy cuts. Also, rebates from suppliers are not recorded in the first and second quarter of each year to ensure sales objectives are met. First quarter results constitute around 10-12% of total year sales.
- Management currently has the capacity to increase its debt level (mainly overdraft). Management views it as necessary to maintain their growth levels as well as beat off UCP to become the number 1 pharma-distributing company in Egypt.
- FY19 capex stands at EGP250-300 million with 3 branches to be inaugurated this year.
- Fleet expansion grows by 3-5% every year.
- 10% of total capex is utilized for distribution centers maintenance.
Anti-Trust Case Updates
- In April 2019, management filed an appeal to lower its anti-trust case fine of EGP160 million (if rejected, the maximum fine would still stand at EGP160 million). If accepted, management expects the case to last for around 1.5-2 years. The probability of acceptance is high due to the court not having specialist consultants to assist in the first trial.
- As a result, management expects minimal provisions to be maintained throughout the case period.
- Management noted that the fully-paid EGP160 million fine would be reimbursed, in the form of cash or tax deduction, in the case where the court annuls or lowers the fine payment.
- Pre-IPO, average payout ratio stood at 50-60%.
- No fixed dividend policy, however management provided a conservative payout ratio target of 15% going forward.
- Management considers ISPH to be a growth stock where the next 5-7 years are core to further development and to continue to invest in the core business.
Management expects FY19:
- Revenue to grow by 23-25% YoY in FY19 (c.EGP16.6 billion).
- EBITDA to record EGP700 million, with an EBITDA margin of 4.4%.
- Normalized net profit of EGP380-400 million, with a NPM of 2.2-2.3%.
- Going forward, management expects NPM to grow by 0.1-0.2pps each year.