EUR 38.47 For Business Accounts Only

Solid, growth story well on track; Reiterate OW

Superior revenue visibility, with further room for upside. CHG’s growth story remains intact, offering a robust 2019-21e EBITDA CAGR of 26%, 20% of which is organic, while the balance stems from the company’s recent acquisitions. CHG trades on a 2020e P/E of c23.1x, while offering a c23% discount to peers when adjusted for growth. We cut our TP by c7%, as we opt to increase our WACC assumption by 100bps to 14.5% (on lower debt weight of c2% vs. 30% previously), while stretching our forecast horizon to 2029e in order to accommodate for the 198-bed Beni Suef facility (operational 2021e, +4% to TP). CHG signed a JV agreement with Nahda University in August, with a total estimated cost of EGP360mn, to be deployed in 2020-21e (we assume a 50/50 debt/equity finance).

Synergies and economies of scale a further boost to earnings growth. We assume a 2019-21e sales CAGR of 26%, stemming from: i) a total patients CAGR of c7%, and ii) pricing power, on improving efficiency (3 hospitals within the Group generate c52% lower revenue/bed vs. Cleopatra Hospital). Synergies, unified terms, and discounts across the Group should translate into c40bps margin accretion p.a., taking CHGs’ GPM to 37.7% by 2024e, up from the current c35%.

2020 offers an outstanding 63% EPS growth. 9M19 numbers were negatively impacted by CHG’s long-term incentive programme (LTIP), which, along with receivables impairment, ate EGP122mn of the Group’s bottom line. We expect no major hit to P&L, aside from an additional EGP51mn in LTIP provisions until 2Q20, unless management initiates a new ESOP. Receivables impairment should normalise at 1% of sales in 2020e onwards, following the company’s recent receivables clean-up. With LTIP provisions behind us (full amount, estimated at EGP169mn, disbursed by end-2Q20), the Group’s CFO should double in 2021e, reaching EGP607mn.

Inorganic growth widens scope for growth. CHG has been actively mulling several acquisition targets, with the current focus being the Greater Cairo region. Over the past year, CHG successfully sealed two deals, adding Queens and El Katib, and launched two polyclinics in East and West Cairo. This, along with Beni Suef Hospital and an additional eight polyclinics by 2023e (+2 p.a., in line with management’s target), contributes c12% of our 2021-24e gross profit estimates.