Market challenges weigh on Saudi healthcare firms: SICO

The short- to medium-term macro outlook for Saudi Arabia’s healthcare sector is weak, given broader market challenges like expatriate fees that pose a risk for overall growth prospects, Bahrain-based SICO said in a report on Thursday.

Saudi Arabia’s private healthcare market depends mainly on expatriates owing to mandatory private insurance requirement, the report noted.

“Additionally, big ticket reforms like privatization of government hospitals and compulsory insurance for Saudi nationals, are likely to take time in our view,” the brokerage added.

Saudi hospitals reported a mixed set of earnings in the second quarter, with Dallah and Care modestly beating estimates, while figures of Al Hammadi and Mouwasat were in line with forecasts.

Only Middle East Healthcare Company (MEAHCO), operator of Saudi German Hospitals, reported a disappointing set of earnings.

Overall, Saudi medical services providers’ net income for Q2 missed consensus forecasts by around 5- 7 percent.

In terms of revenue, only Mouwasat and Hammadi reported YoY revenue growth at 18 percent and 28 percent respectively, driven by higher contribution from the Riyadh Hospital for Mouwasat, and a lower base at Hammadi as the Olaya branch was closed for a month due to a fire incident.

The sector’s operating margins declined, led by Care (down 13.8 percent) and Saudi German Hospitals (520 basis points) due to a pricing revision from a major government client.

Meanwhile, operating margins of Dallah and Mouwasat improved by 390 bps and by 40 bps respectively, driven mainly by lower general and administrative expenses for Dallah and improved volumes for Mouwasat.

“While we like the sector’s strong long-term fundamentals, valuations now look stretched and stocks offer limited upside and thus we maintain our “Neutral” stance on the sector,” SICO said.

The investment bank recommended investors should stick to Dallah (Neutral, TP SAR 120) and Mouwasat (Neutral, TP SAR 165), compared to the names exposed to overdue government payments: Saudi German Hospitals (Sell, TP SAR 65), Hammadi (Neutral, TP SAR 36) and Care (Neutral, TP SAR 50).

Commenting on the announcement this month that Al Hammadi and Care have begun discussions to study a potential merger, SICO said that if the deal goes through, the combined entity will likely benefit from operational synergies as both names have 100 percent exposure to the “premium Riyadh market.”

“The merged entity would have the largest number of beds among listed private hospitals in Saudi Arabia without material risk of cannibalization as there is no location overlap, though all the hospitals are in Riyadh,” it added.