EUR 27.64 For Business Accounts Only

IDHC LN | Reduce to Neutral on currency weakness

Revisiting growth. PCR test prices fell sharply (EGP450 vs. cEGP2k last year) and COVID-19 business is no longer margin-accretive. But regardless, the fast dissipation of COVID-19 (51% of 2021 revenue) was in our model. EGP weakness and the ensuing impact this will have on affordability, however, has us reducing our 12M TP by 38% to USD1.17/share, warranting a rating downgrade to Neutral. Pricing of medical services in Egypt are contextually high and cost pressures are seen as deterring traffic. IDH’s FCY-linked costs have historically averaged 36% of CoGS and 18% of sales.

A pressured consumer. IDH is a price-setter in Egypt, with a branch network that is 2.8x of the second largest player. Yet, it has not raised prices y-t-d beyond its typical 10% on walk-ins, 5-7% on corporates, despite having only c3 months of kits inventory when the EGP weakened by 18% in Mar-22. Walk-ins, who are self-payers, were 42% of IDH’s 1Q22 net sales. We expect that further EGP weakness will warrant supplementary price hikes, weighing on traffic, but not to the extent that would allow for the pre-pandemic EBITDA margin of 42%. Rather, we look for EBITDA margins of 39% for 2022 (1Q22 was 39.7%) and 39.8% for 2023, leaving absolute EBITDA -39% y-o-y and +9% y-o-y, respectively — on average c9% lower than previous forecasts.

Sourcing of kits are a non-issue. We do not expect the current global supply chain bottlenecks, nor domestic FX supply backdrop, to limit IDH’s existing operations and overall growth plans. Thanks to a proactive inventory sourcing strategy, it is facing no material issues in securing raw materials and continues to hold sufficient stock to cover three months of operations, in line with its standard operating policy. IDH is working on securing additional stock at competitive prices, leveraging on its long-standing supplier relationships.

Pakistan deal delayed. The stock trades on a 2023e P/E of 15.4x. While this is 32% below regional industry peers, the multiple the market has been willing to pay for IDH has consistently derated since 2016 reflecting, in our view, the Egyptian consumer sector’s woes. Closure of the IDC transaction in Pakistan, where the long stop date was extended to Sep-22, could prove value-accretive, should IDH adjust the purchase price to reflect USD: PKR weakness.