Q1 2017: Positive surpriseDallah’s Q1 2017 results were a positive surprise as net profit grew 46.3% y-o-y to SAR85mn, beating our (SAR64mn) as well as consensus expectations. We believe the profitability during the quarter was primarily boosted by reversal of provisions, after the company received payments from government authorities. Other healthcare stocks could also see positive earnings surprise as delayed government payments has been one of the key concerns for the sector especially for Al Hammadi and Care. We have revised Dallah’s estimates post the stronger-than-expected earnings. Though we have slightly lowered our revenue expectation post the weaker than expected topline growth in Q1 we have raised margin forecasts. Based on our revised estimates, we raise our target price for Dallah to SAR105 per share.Profitability:
Despite the single digit top line growth, the company’s net profit surged 46.3% y-o-y to SAR85mn, beating our (SAR64mn) and consensus (SAR63mn) estimates. Net profit margin expanded ~770bps y-oy to 28.1%. Our analysis suggests that most of the surprise was below the gross profit level. Operating expenses were much lower than expected, which led to a 38.6% y-o-y increase in operating profit, supported by reversal in provisions on account of material cash collections from governmental authorities, and lower selling & distribution expenses due to restructuring of the distribution activities of Dallah Pharma.Expansion plans:
Dallah has aggressive expansion plans, the company is adding new capacity at its Riyadh hospital (+250 beds/+160 clinics), which is expected to be completed in 2018, while its new Namar Hospital in Western Riyadh (+400 beds/200 clinics) is expected to be completed by H2 2018. In addition, the company has also signed an MoU to build a hospital in Jeddah. We believe these expansion plans will ensure strong earnings growth for the company over the next few years.Valuation:
We have raised our target price of Dallah to SAR105/share after updating our forecasts for the company post the Q1 2017 results.
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