EUR 61.94 For Business Accounts Only

SPMD EY | Strong growth, ST catalysts; Initiate with OW

Nascent healthcare player in growing, underfunded market. We initiate coverage on Speed Medical (SPMD) with a 12M TP of EGP3.50/share (42% upside), warranting an Overweight rating. SPMD is a local healthcare provider offering pathology, radiology, and medical centre services. It runs 70 pathology labs, a radiology lab, and a polyclinic (eight clinics). SPMD is adopting an expansion plan to add 25 labs and one polyclinic p.a., as well as a 140-bed hospital over 2021-22e (67 beds in phase one). The stock trades on an attractive 2020e P/E of 14.1x, 43.8% below MENA peers’ 25.1x, a steep, unjustified discount despite its size and listing on Nilex, in our view. Our model forecasts a robust 2019-21e EPS CAGR of c80% vs. peers’ average 26.8%.  

Prime Speed helps SPMD benefit from COVID-19, enhance branding. In Apr-20, SPMD’s traffic at labs and clinics was down by c50% on the nationwide curfew implemented. To help offset the traffic slowdown, SPMD partnered with Prime Group (owner of Prime Pharma) to establish Prime Speed to conduct COVID-19 tests, as the sole government-approved conductor of coronavirus tests in Egypt. SPMD, which owns 30% of Prime Speed, targets carrying out 300k coronavirus tests in 2020, contributing an after-tax investment income of EGP42mn to SPMD’s 2020e earnings. Our model assumes Prime Speed’s contribution to our enterprise value at 15%.

Greenfield hospital to integrate offering, streamline growth. In 2H19, SPMD started building a 67-bed hospital in Obour City, at an investment cost of EGP210mn (cUSD0.20mn/bed). We only factor the 67-bed hospital (patient intake in 2H21e), due to lack of visibility on timing and funding, integrating services, and streamlining lab and clinic’s LoB growth. We see the hospital’s sustainable EBITDA margin at 23%, bringing down the Group’s to 30% (c45% in 1Q20). Obour Hospital represents 14% and 15% of the Group’s attributable EBITDA and our enterprise value, respectively.

Potential shift to EGX in 4Q20 key catalyst, trigger for strong rerating. SPMD is currently listed on Egypt’s small and mid-cap exchange, Nilex. In 2Q20, SPMD’s shareholders approved a EGP151mn capital increase to finance capex of the hospital, clinics, and labs over 2020-21e. We expect SPMD to raise its paid-in capital to EGP222mn, and join the EGX by 4Q20 (minimum capital requirement of EGP100mn vs. EGP1mn for Nilex). This would mark SPMD as the first mover to the main market since Nilex’s debut in 2010. This should trigger risk compression for the stock, in our view, in line with the potential increase in trading activity.