On an M&A spree; Reiterate Overweight

Consolidation story continues to unfold. We raise our TP by 19% to GBP41.5/share, incorporating NMC’s 1H18 acquisitions in our numbers, including the company’s remaining minority stakes in Fakih IVF (49%) in the UAE and As Salama Hospital (30%) in the KSA, as well as the acquisitions of Al Salam Medical Group (80%) in KSA, CosmeSurge (70%) in the UAE, and as we roll over our DCF. NMC’s superior growth profile (2018-22 EPS CAGR 31% vs. peers’ 18%) warrants a premium to peers, in our view. Nonetheless, the stock trades on a 2018e EV/EBITDA of 20.6x(vs. c17x for Saudi peers), at a 30% growth adjusted discount to EM peers, providing an ideal, risk diversified, exposure to MENA fast growing and unpenetrated markets.

Saudi takes centre stage. On 20 June, NMC signed a non-binding agreement with Hassana, the investment arm of GOSI, Saudi’s largest pension fund, to create a new JV through contribution of NMC’s existing assets in Saudi and GOSI’s c39% stake in CARE. The JV will have a combined capacity of 1,489 beds (664 by NMC and 825 by CARE), potentially adding USD53mn to NMC’s 2018e EBITDA (+11%). We opt not to consolidate CARE in NMC’s numbers, as the deal is still pending regulatory approvals. Capitalising on Saudi’s underserved market (2.2 bed/1k capita vs. 4.8 for OECD), NMC geared up its exposure to Saudi, with the bed contribution to the group expected to rise to 34% in 2018e, excluding CARE, from 18% in 2017.

Balance sheet remains in comfort zone. NMC’s leverage is not concerning, in our view; we estimate 2018 net debt/EBITDA at 2.8x vs. c2x for regional peers, and potentially rising to 3.2x if the Hassana deal is sealed. The deal values CARE at SAR70.0/share, implying a 2018e EV/EBITDA of 16x, and will be through a share swap in new the JV, with NMC retaining a controlling stake. According to our conversation with NMC, the deal will likely be closed by 4Q18/1Q19.

Egypt next in line? NMC signed, in Jan-18, an O&M contract to manage Emirates Healthcare Group’s Egyptian hospitals, Dar El Fouad, and Al Salam International, with a combined capacity of 860 beds, generating USD2mn revenue in 2018e (11% of the O&M vertical revenue). We believe this could be a step to closely study the market before acquiring these assets, similar to what NMC did with CosmeSurge. The move, if it materialises and depending on valuation, would boost NMC’s capacity by c45%, expanding its footprint to Egypt’s underserved market.