Equity Analysis /
Egypt

Cleopatra Hospitals Group: Q1 19: Price-driven topline; one-off costs pressure margins; alpha is in expansion

    Mohamed Hamza

    Price Growth Leads Topline Surge

    CLHO reported 1Q19 revenues of EGP416 million, up 6% QoQ and 20% YoY. Overall volume came in flat annually and dropped 7% sequentially, therefore topline growth was driven by improved case mix throughout all operational services, where revenue per service recorded an average increase of 16% YoY and 13% QoQ.

    Operational Efficiency Improves GPM; Impairment Pulls Down Profitability

    Despite the significant rise in wages, medical supplies expenses, consulting physicians by 18%, 12%, 10% YoY respectively, management were able to enhance GPM to 37% in 1Q19 from 34% in 1Q18 as a result of higher operational efficiency; exhibited by improved COGS/Sales at 63% in 1Q19 vs 66% in 1Q18.

    EBITDA margin was squeezed to 17% vs 21% and 30% in 1Q18 and 4Q18 respectively on the back of G&A expenses increasing by 80% YoY and 113% QoQ. Nevertheless, the annual bump in G&A expenses was driven by a one-off increase in trade receivable impairment expense (+273% YoY). If normalized, EBITDA margin would have recorded 23% (+2pps YoY). EBITDA drop trickled down to lower 1Q19 NPM to 13% vs 15% in 1Q18. NPM drop was offset by improved net interest balance (+45% YoY), on the back of lower debt levels of EGP11.6 million vs EGP95.1 million in 1Q18 (-88% YoY), as well as lower general provisions (-57% YoY). 

    Expansion Plans On Track; Alpha is in Expansion 

    With 2 polyclinics expected to be fully operational in 2Q19 as well as integrating Queens Hospital (50 beds) in CLHO’s portfolio since mid-March19, we have added EGP0.73 and EGP0.21 respectively to our base case FV (EGP 5.29) to be EGP6.23. Other projects including the potential expansion of Al-Sherouq Hospital, and the acquisition of El-Katib Hospital will add EGP1.15 to our base case FV to eventually reach EGP7.38. 

    Management recently acquired four floors in an adjacent building to Al Sherouq Hospital, which should support inpatient & outpatient capacity growth in the coming period. As noted in our 4Q18 results note, management disclosed that an amount of EGP143.6 million was paid to acquire both land and building of El-Katib Hospital, while confirmation on the operations transfer is still not finalized. 1Q19 capex totaled EGP63 million, where management intensified facilities’ renovations along with acquiring new medical equipment. It was recently announced that the Ministry of Health finalized agreements with CLHO and other hospitals to train medical and administrative staff, in light of the Universal Healthcare System’s rollout in July 2019. 

    CLHO was added to MSCI’s ‘Small-Cap Emerging Markets Index’. CLHO is trading at EV/EBITDA19 of 19.1x and P/E19 of 25.8x, above market average of 13.4x and 21.1x, respectivelyCLHO is trading at a premium to peers, primarily due to offering the best exposure to the Egyptian healthcare sector.