We maintain our Overweight rating on Mouwasat with a revised PT of SAR95.1. Given its strong balance sheet, low leverage and diversified client base, we believe Mouwasat is well-positioned to weather the near-term headwinds arising from the COVID-19 pandemic. We believe expansion projects in Dammam and Madinah, together with the ramp-up of Khobar operations, remain the key earning drivers. The stock is trading at an attractive 2021f PE of 19.5x, well below its the five-year average of 25.7x.
Positive long-term outlook, despite near-term headwinds: Given the precautionary measures to stop the spread of COVID-19, we believe most of the hospital’s elective procedures, tests and non-essential medical services have been postponed or cancelled. In our base case, we expect patient count to significantly decline for a period of four months (c50% of regular care), which we believe will potentially impact Mouwasat’s H1 20 earnings. As the economy starts to reopen gradually, we expect patient volumes to recover in H2 20 as restrictions ease. We believe Mouwasat is well-placed to navigate the current crisis given its strong balance sheet with low leverage, a high cash balance and short cash cycle. However, we do highlight that 2020f estimates are subjective, as the COVID-19 pandemic continues to evolve.
Expected growth of c25% in bed capacity to drive volumes: Over the long run, we believe Mouwasat’s value proposition remains intact given its favorable client mix (c75% of its client base is insurance or corporate) and strong expansion pipeline. The brownfield expansion projects at Dammam (completion in Q3 2020f) and Madinah (Q4 2020f) are expected to increase Mouwasat’s net bed capacity by c24% from c1,079 in 2019 to c1,344 in 2021f. Moreover, we also expect Khobar hospital to start contributing positively to the company’s bottom-line in towards the latter part of 2020f.
Profitability to grow at a 4.2% CAGR between 2019-2024f: We expect 2020f revenues and net income to decline -17.5% and -54.1% yoy, respectively, before normalizing in 2021f. We estimate patient volumes and revenues to grow at a CAGR of +3.9% and +5.1%, respectively, between 2019-2024f, driven by capacity additions and higher utilization of the Khobar hospital. We have remained conservative in our margin assumption, given increased competition in Dammam and Khobar from new openings by SGH and HMG. We expect gross margins to range between 42-43% during 2021- 2024f vs 45% in 2019. Net income is expected to grow at a CAGR of 4.2% over the next five years from SAR421mn in 2019 to SAR517mn in 2024f.