EUR 36.50 For Business Accounts Only

IDHC LN | Reiterate Overweight ahead of bumper dividend

IDH stands out, on attractive yield. While Omicron has raised case count, COVID-19 testing prices in IDH’s core Egyptian market have come off after the Ministry of Healthy lowered pricing in Oct-21. IDH followed suit, reducing its prices by c25%. On conventional business though, it introduced the customary price hikes for walk-in (of 10%) and for corporate clients (case by case, of 5-7%), as of Jan-22. The net effect of these developments are broadly EBITDA-neutral, but as we rollover our DCF, our 12M TPs stand at USD1.90/share and EGP30.0/share, ~6% above our last update. We remain Overweight, ahead of a bumper dividend (2021e yield of 11.5% on the LSE, 11.9% on the EGX, with the DPS announcement due with 4Q21 results, mid-April), as well as the closure of Islamabad Diagnostic Center (IDC) transaction in 1H22, which is not in our forecasts.

IDC in Pakistan contingent on conditions precedent. One of the critical CPs for the IDC transaction to close is approval for dividend repatriation. At an undemanding EV/EBITDA of 6x, IDC would provide access to a high-growth populous country, without straining IDH’s management. The business appears to be well-run, having generated a decent EBITDA margin of 48% in Jun-20 to Jun-21 vs. c50% for IDH over the same 12 months. On a pro forma basis, IDH’s EBITDA split would be: i) Egypt (76%), ii) Pakistan (15%), iii) Jordan (9.5%), iv) Sudan (0.2%), and v) Nigeria (-0.3%).

Dividends intact. Although the IDC deal would be the largest overseas M&A for IDH (at USD72mn), it would not affect our dividend outlook for 2022 and thereon, thanks to sufficient balance sheet liquidity (for both IDH and IDC), as well as attractive funding terms on IDC deal debt, with a weighted average 3.5-year grace period.

Contained risks. The key downside risks are: i) currency weakness in core markets, and ii) headwinds from global supply shortages, but we believe neither is probable or meaningful enough to change our OW call. IDH has taken proactive steps to build inventory to shield operations from any potential future disruptions (to date there have been none). It is also worth highlighting that IDH’s test kits are purchased on fixed-price contracts with tenors ranging from 5-7 years, providing effective protection from short-term price fluctuations.