Al Mouwasat Medical Services: Q1: Inline results. Remain Neutral

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1. Al Mouwasat Medical Services Co Healthcare – Industrial MOUWASAT AB: Saudi Arabia 13 May 2018 Target price Current price 178.0 182.0 2.0% below current as at 10/5/2018 Existing rating Underweight Al Mouwasat Medical Services Overweight Neutral Overweight Performance Price Close MAV10 MAV50 Relative to TADAWUL FF (RHS) 150.0 130.3 130.0 118.9 110.0 107.4 Vol th RSI10 90.0 96.0 70 30 -10 800 600 400 200 01/16 04/16 07/16 10/16 Source: Bloomberg Earnings Period End (SAR) Revenue (mn) Revenue Growth EBITDA (mn) EBITDA Growth EPS EPS Growth DPS 2017A 1507 21% 461 27% 6.7 29% 3.0 2018E 1717 14% 535 16% 7.7 16% 3.5 Source: Company data, Al Rajhi Capital Research Department Yazeed Alsaqaaby Tel +966 11 211 9398, Alsaqaaby@alrajhi-capital.com 2019E 1941 13% 592 11% 8.6 12% 4.0 Q1: Inline results. Remain Neutral Mouwasat posted a strong set of results in Q1 2018 with revenue (+21% y-o-y) and net profit (+24% y-o-y) inline compared to our estimates. The strong growth was driven by improving utilization rates at Riyadh and other hospitals/clinics and low SG&A expenses relative to previous quarter. Next quarter the utilization rate is likely to decline for both inpatient and outpatient due to seasonality effect. However we expect growth to pick up as the company is expected to open Khobar hospital (280 beds, 100 clinics) in Q3 2018 which will be a new revenue driver. In the long-term, we believe there is still room for improvement in profitability, on the back of further utilisation ramp-up in Riyadh Hospital as well as opening of Madinah hospital (Q4 2020)and Dammam hospital expansion (Q2 2020). Mouwasat’s stock price surged ~15% in Q1 2018, and at current levels we believe the stock price already incorporates these positives, leaving limited further upside in the short term. We change our rating to Neutral on the company with a target price of SAR178/share. Revenue: Mouwasat reported a sharp 21% y-o-y increase in revenue to SAR439mn, slightly lower than our (SAR449mn) estimate. The top line was boosted due to an improvement in utilization rates. We believe next quarter will witness a drop in utilization rate due to seasonality effect. Profitability: Gross profit surged 24% y-o-y to SAR216mn above our estimate of SAR222mn. The sequential increase in gross margin is indicative of improving utilization of resources and is likely to continue in long run as patient visits increase at the Riyadh hospital. Operating profit grew 25% y-o-y to SAR116mn due to lower SG&A expenses. Conclusion and valuation: Mouwasat hospitals showed strong and consistent growth during the past years with a smart expansions and efficient management of hospitals. There are plenty of growth drivers which we believe will be capitalized on by the management. However for now, we believe the stock incorporates these positives, leaving limited upside potential for the short term. We are Neutral on Mouwasat with a target of SAR178 based on an equal mix of DCF and relative valuation (12month forward target P/E of 24x). Figure 1 Mouwasat: Summary of Q1 2018 results SAR mn Revenue Gross Profit Gross Margin Operating Profit Net Profit Q1 2017 363 173 48% 93 85 Q4 2017 431 211 49% 108 98 Q1 2018 439 216 49% 116 106 % chg y-o-y 21% 25% NA 25% 24% % chg q-oq ARC Estimate 2% 449 2% 222 NA 50% 7% 123 8% 112 Source: Company data, Al Rajhi Capital Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
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