SGH reported another disappointing set of results, with a net income of SAR15mn, declining 83.3% yoy (-52.5% qoq). This is the lowest net income since Q1 14 and is significantly lower than the NCBC and consensus estimates of SAR54mn and SAR43mn, respectively. We believe this is attributed to: 1) weaker revenues on lower number of patients, and 2) margin contraction. In view of the ongoing earnings weakness, we have placed the stock Under Review.
Revenues declined by 11.4% yoy (+12.7% qoq) to SAR350mn. This is 13.2% lower than our estimate of SAR403mn. We believe the variance is attributed to a lower-than-expected utilisation rate and contractual terms. The management attributed the decline in revenues to lower patient traffic due to renovations at some of the group hospitals.
With COGS broadly in line with our estimates (+5.5% yoy), we believe lower revenue cascaded down to lower gross margins. Gross margin contracted significantly to 29.0% in Q1 19 versus our estimate of 37.5% and 35.9% in Q4 18. We believe the yoy increase in COGS is due to: 1) higher-than-expected employee costs, and 2) higher depreciation costs due to renovations at hospitals. Meanwhile, the qoq decline in gross margins is attributed to year-end rebates by suppliers on drugs and consumables.
Operating income declined 78.6% yoy to SAR18mn (-23.6% qoq), coming in significantly lower than our estimates. Despite lower revenues leading to the variance at the EBIT level, we highlight that opex-to-sales was in line with our estimates at 24.0%. However, absolute opex increased to SAR84mn in Q1 19from SAR74mn in Q1 18, mainly due to the expat levy.
Other expenses stood at SAR3mn versus other income of SAR1mn in Q1 18 and our estimates of SAR0.1mn. We believe this was the result of higher-than-expected finance charges due to the utilisation of the working capital facility.
New hospital in Dammam will be completed by 6 June. SGH announced that the hospital, which has a capacity of 150 beds and 100 outpatient clinics, has reached 93% completion. We believe the new opening will impact margins negatively in H2 19 due to lower utilisation in the initial period and competition from other upcoming hospitals.
In view of the disappointing results and the ongoing earnings weakness, we have placed the stock Under Review. We will shortly publish our revised estimates and ratings for the stock.