EUR 32.64 For Business Accounts Only

CLHO EY | A deftly maneuvered healthcare player; Reiterate OW

Solid business model at undemanding valuation. We reiterate our Overweight rating on CHG, a unique exposure to Egypt’s healthcare story, on the mix of a high growth profile, healthy margins, strong FCF generation, liquid BS, and solid business model. We foresee a strong rebound in 2H20, translating into a 2020e y-o-y flattish adjusted EBITDA of EGP507mn. We revise our TP downwards by c15% to EGP6.30/share, as we trim our 2020-24e EBITDA forecasts by 15%, as the pandemic resulted in a difficult to catch-up to, one-year delay in revenue evolution. CHG trades on a 2021e P/E of c20x, 23% below regional peer average, while offering a 2020-22e EPS CAGR of c23%, broadly in line with peers’ average of 26%.

Well-steered group through COVID-19 pandemic. During 2Q20, CHG’s management converted its recently acquired hospitals (El Katib and Queens) into COVID-19 treatment centres, boosting the latter’s utilisation rates, while substantially improving the sales mix, resulting in blended 40% gross margins for both entities in 2Q20. The Group recorded y-o-y flattish revenues during 1H20, as the 16% dip in the number of cases was offset by a surge in revenue/case. We foresee a c25% y-o-y surge in 2H20 revenues and gross profit, implying a c35% GPM, chiefly stemming from a rebound in the number of cases in 2H20, reaching 2H19 levels, along with higher revenue/case.

IVF Centre, Beni Suef Hospital widen scope for growth. We see both entities, combined, contributing 10% to CHG’s 2022e gross profit. The newly-acquired IVF centre, Bedaya, should fully reflect on 2021 numbers, while 198-bed Beni Suef Hospital’s revenues to kick-in in 2022e. We like Bedaya’s high-margin business, with a projected EBITDA margin of c40%, and foresee a 2022-24e EBITDA CAGR of 45% for Beni Suef, with a 25% target EBITDA margin. Bedaya will offer the Group access to a new segment, while Beni Suef will enable CHG to expand its footprint.

Resilient business with limited downside risks. CHG’s business has proven resilient during the pandemic. We see limited downside risks to our forecasts. Upside risks would arise from a potential value accretive acquisition, with management looking into brownfield targets in untapped areas in Cairo and Alexandria, making use of the company’s solid net cash position of EGP390mn, as of 2Q20. We note that a new ESOP, starting 2H20, is pending shareholders’ approval, funded by retained earnings or reserves, which might result in 50-100bps annual dilution, on our figures.