Aljazira Cap initiates Saudi German coverage with ‘overweight’, TP 60.7

Aljazira Capital has initiated coverage on Middle East Healthcare Co. (Saudi German Hospital), with an ‘overweight’ recommendation and a target price of SAR 60.7 per share.

This rating is mainly driven by the price pull-back following the Q3 2017 earnings to close at an all-time low, the brokerage said in a recent report.

Saudi German Hospital’s Q3 2017 results were well below consensus estimates, due to an increase in SG&A expenses, higher provisions and initial losses at Hail hospital.

“Our ‘overweight’ recommendation on MEH (Saudi German Hospital) partially stands on estimated forward improvements in receivables and provisions, which would reflect positively on company’s income statements and cash flows,” the report said.

Aljazira Capital maintained long-term positive outlook on the Saudi healthcare sector, supported by the gradual easing in receivables through 2017 along with steady growth in the sector’s top-line and continued expansion trajectory.

The brokerage maintained a ‘neutral’ recommendation on Dallah Healthcare Co. (with a target price of SAR 103.5), Mouwasat (target price SAR 149) and Al Hammadi (target price SAR 31.3).

National Medical Care Co. (Care) was updated to ‘neutral’ with a target price of SAR 39.2.

“We maintain a prospect for an upgrade on Dallah in the event of a significant earnings beat post Q1-2018 on better than expected ramp up losses of upcoming expansions and improved visibility on sector regulatory reforms going forward,” Aljazira Capital said.

“Mouwasat and Dallah are expected to outpace the sector, supported by relatively consistent FCF generation and balance sheet position,” it added.

According to Aljazira Capital, receivables remain as a concern for Al Hammadi, Care and Saudi German Hospital.

Care and Al Hammadi have the highest receivables at 84 percent and 99 percent, respectively,  mostly due to exposure to government and government-related entities, the report said.

As of Q3 2017, Care’s exposure to government-related entities is estimated at 76 percent of receivables, while Al Hammadi is estimated in a range of 80percent to 90 percent of receivables.

“Prolonged receivables concentration and slower cash conversion cycles would translate into increased short-term pressure on cash-flows, resulting in potentially higher financing needs and cost,” the brokerage said.