Q2 2017: Meets expectations



Hammadi’s Q2 2017 results were largely in line with our estimates. The company’s revenues grew ~28% y-o-y to SAR177mn, while net profit surged 24.4% y-o-y to SAR25.7mn, in line with our SAR25mn estimate. Growth is expected to remain elevated in the second half on improving utilization of the existing hospitals, and next year with the start of operations at Al Nuzah hospital (expected in late 2017 or early 2018). We don’t expect the company to announce a dividend this year as well due to rising receivables and the ongoing expansion. We reiterate our target price of SAR40 on Al Hammadi with a Neutral rating.

Q2 2017 results: Key takeaways
•?Revenue jumped ~28% y-o-y to SAR177mn, from the low base of Q2 2016, when the Olaya hospital remained closed due to the fire incident. In addition, improved contractual terms with some customers also supported the top line. However, we believe the top line growth was restricted by the pricing revision with health ministry.
•?Gross margins fell ~880 bps y-o-y, however, the operating margin contraction was restricted only to ~200bps y-o-y to 19.2%. The lower profitability can primarily be attributed to increased costs related to the preparation of Al Nuzha hospital.

Our view
Hammadi’s net profit has jumped 24.4% y-o-y in H1 2017. We expect top line growth to remain elevated in the second half with the improving utilization of the existing hospitals. However, the staffing for the new Al Nuzha hospital will weigh on profitability. Al Nuzah hospital will drive the company’s top line growth in 2018 and also increase Hammadi’s cash customer base due to its favourable location. The company’s board of directors announced starting discussions with National Medical Care (Care) over a possible merger, we believe a merger would help both companies to address their specific issues (for more details please refer to our note on the merger).

Valuation
The company’s expansions (Al Suweidhi and Al Nuzaha) along with the increase in receivables have put further pressure on its cash position. Thus, we don’t expect dividends also this year. By 2016-end 95% of the company’s receivables were related to two government entities and four insurance companies. The company’s stock has been under pressure since May. The stock currently trades at ~28x FY18 EPS. For now, we reiterate our Neutral rating on the stock with a target price of SAR40 per share.


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