EUR 26.12 For Business Accounts Only

Robust year ahead but valuation is rich; Cut to N

Operations resilient but insufficient to fully offset FX dilution. We raise our 2018-22e EBITDA by c24% as we: i) hike revenue/test assumptions by c27% (assuming an average price increase of 10% p.a. vs. 6% previously), and ii) factor in a faster rollout of new branch additions. Despite the EBITDA hike, we raise our TP by 10% to USD4.6/share, as our higher USD:EGP assumption (16.5 from pre-float level) dilutes IDH’s valuation. Accordingly, we cut our rating to Neutral, on limited upside. IDH trades on a 2018e P/E of 24x (at an FX rate of 16.5), broadly in line with global peers.

Network expansion to counter declining footfall. Aggregate number of patients has been on the rise, mainly driven by new branch additions (+30 in 2017e), while average patients/branch (a proxy for LFL) dropped in 2016 and 1H17. We expect to see recovery in LFL traffic, as consumers adapt to the new prices (walk-in patients per branch inched down 2.1% in 3Q17 vs. -16% in 1H17). Over 2018-21e, we look for a 10% growth in number of patients p.a., driven by recovery in patients per branch (+4% p.a.) and network expansion (+22 new branch p.a.).

Corporate business to drive short-term growth. Prices for corporate clients (73% of traffic, 61% of revenue) were raised by 15% in Jan-18 vs. +10% for walk-ins. We forecast corporate business to grow by 28% y-o-y in 2018 vs. 21% for walk-ins, as corporate patients proved to be less elastic to price hikes. We expect a healthy 2018 EPS growth of 31%, on top line growth, and an EBITDA margin expansion (+190 bps) to 40.7%. Management has guided for flattish 2017 DPS; we assume a DPS of USD0.13, implying a payout ratio of 98%, yielding 2.9%.

Nigeria a medium-term play. In Dec-17, Dynasty, a JV 51% owned by IDH and 49% by Man Capital, partnered with the IFC to acquire a majority stake in Echo‐Scan, a leading medical diagnostics player in Nigeria. Dynasty, and the IFC will invest USD25mn over 3-4 years to expand Echo‐Scan's current network of 12 branches. The Nigerian market is fragmented and healthcare spending is low (c3.7% of GDP vs. c5.8% for lower middle income country peers), offering ample room for growth, should IDH succeed in replicating its hub, spoke, and spike model in Nigeria. We exclude Dynasty from our model, pending more clarity on the execution plan.