EUR 38.36 For Business Accounts Only

IDHC LN | 2021 operational recovery priced in; Cut to Neutral

Stock fairly priced, 6% yield to resume in 2021e. We value IDH using five-year DCF model leading to a 12M TP of USD4.10/share, warranting a Neutral rating, revised downwards from USD5.00/share. This comes as we factor in lower traffic in 2020e, negatively impacted by the COVID-19 outbreak, and higher capex, uplifted by radiology expansion. IDH trades on a 2021e P/E of c16x, in line with its historical average, reflecting full operational recovery in 2021e. We pencil in a 100% payout ratio in 2021e, leading to a c6% dividend yield. Further upside from M&A activity is on the table, backed by a liquid, healthy, BS (1Q20 net cash to EBITDA ratio at 0.7x).

COVID-19 pressured 1H20 revenues; Gradual recovery expected starting 3Q20e. The COVID-19 outbreak has resulted in a c20% decline in 1H20 number of patients, which translated into a 15% and c50% drop in 1Q20 and 2Q20e EBITDA, respectively. We expect a gradual recovery in 2H20 numbers, underpinned by a rebound in traffic now that almost all IDH’s branches are operating at normal working hours, with the exception of Sudan. This, further backed by solid momentum in COVID-19 prognostic tests, should result in a mere c4% decline in 2020e top line, along with 6ppt decline in EBITDA margin, leading to an 18% drop in 2020e EBITDA.

Long-term growth story intact, Egypt remains key driver for growth. Our model factors in a V-shaped recovery with IDH’s 2021e revenue, margins, and earnings back to 2019 levels. This is expected to be followed by a c20% 2021-23e earnings CAGR, underpinned by a: i) 15% revenue CAGR, c7-8% of which is driven by an increase in average blended price/test, ii) slight, gradual pick-up in EBITDA margin on economy of scale, and iii) decline in interest expenses. Egypt is to remain IDH’s main growth driver, fuelled by 25 branch additions p.a. (one of which is a radiology branch), solidifying IDH’s current 50% market share of Egypt’s diagnostics market.

Risk profile balanced. We view IDH’s risk profile as well balanced, with limited room for surprises. A windfall stemming from COVID-19 mass testing in Egypt (currently restricted to public labs) represents a major, hard to quantify, upside risk to our numbers. We calculate that every 100k higher-than-expected number of patients will add c7% to our 12M TP, all else constant. Conversely, every 5% higher-than-expected EGP devaluation would shave 7% off our TP, all else constant. Our model factors in a 5% annual EGP depreciation, accompanied by a c7-8% hike in average price/test.