Al Hammadi, Care potential merger could boost profit, cash flows: Al Rajhi Cap

If successful, Al Hammadi and National Medical Care’s potential merger would help both companies address specific issues such as the former’s negative operating cash flows in four out of the last five quarters and Care’s lower profit in the last four quarters, Al Rajhi Capital said in a recent note.

“This merger may not have sizeable conventional synergy benefits such as cost savings. Benefits are more likely to lean towards addressing issues which we believe are different for both the hospitals,” the brokerage firm added.

It could also create the largest publicly listed healthcare company in the Kingdom with a combined capacity of around 2,113 beds by 2018.

Other advantages from the planned consolidation would include lower general and administrative expenses, better operating cash flows and capital structures, pricing negotiations with insurance firms as well as garnering more market share in cash and corporate segments.

Care’s assets could see better management—particularly the national hospital in Malaz—and bring an anchor investor which was previously non-existent in the company.  

Hammadi will likely benefit from positive operating cash flows of the combined entity, though it is projected to continue generating negative operating cash flows in the short term, if there are no government payments.

It may also leverage Care’s family clinics which could start driving more patient traffic to Hammadi’s hospitals.

Meanwhile, account receivables position will still continue to be weak.

“Though all the hospitals are in Riyadh, there is no location overlap which is positive as capacity utilization of individual hospitals can be improved with little risk of cannibalization,” Al Rajhi Capital said.

The brokerage firm said the outlook for the sector, however, is weak in the near term in light of the broader market challenges, such as expat fees and other reforms, which could rein in growth for the overall sector and make value creation via mergers more rational.