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MAHARAH AB | Growth prospects too appealing to ignore

Stock is mispriced, on a 2023e PEG of 0.2 vs. 1.2 for industry. The margin-dilution from Maharah’s new acquisitions that are in start-up negatively surprised us (and the market) in 1Q22. Closed and pending transactions, however, are profit-generating operating assets, with no further M&A on the table. Also, 2Q22 showed q-o-q margin improvement, which we expect will continue. New acquisitions will be below the line, providing clarity on Maharah’s core business. We believe Maharah offers an attractive play on Saudi’s labour market growth and reforms.

Resources have positively surprised. We raise our 2022-24e revenue projections by 5.6%, on higher deployed resources in 1H22e, and a new contract with Saudi Binladin Group for 3.4k resources (9% of 2021e resources). The Saudi Arabian labour market is robust, with our in-house GCC economist expecting unemployment to reach an eight-year low of 9.8% in 2022 vs. 11.04% in 2021. Expats (ex-household labour) also rose for the first time since the pandemic by 4.4% q-o-q to 6.3mn in 4Q21. Tapping of government and semi-government entities, as well as new sectors such as home healthcare and petrochemicals, presents scope for further upside.

Revised outlook gives no weight to start-ups. The series of acquisitions of small start-ups, which took a toll on Maharah’s margins (1H22 EBITDA margin fell 4.5pp y-o-y to 8.6%), have ended. The only new M&A (SMS, acquired in Aug-22) is a profitable operating investment, which we expect to add SAR33mn in associate income, representing 23% to 2022e bottom line. SMS is a well-established food catering provider in Saudi Arabia, offering synergies with regards to labour sourcing.

Dividends unaffected. Maharah has healthy liquidity, with its 1H22 net cash at 2.6x EBITDA and working capital is cash-generating. Management financed SMS’ SAR427mn acquisition using 85% debt, and later proposed a 1H22 DPS implying a 90% payout. This confirms the commitment to sustaining a healthy dividend stream despite M&A activity. The acquisition of Care Shield, which owns an operational 300-bed hospital in Riyadh, is pending for 4Q22, but this should also be predominantly debt-funded. We expect a 2022 dividend yield of 4.7%, rising to 7.6% in 2023.