Al Hammadi disclosed its Q2 2017 interim results revealing a bottom line of SAR 25.7 million compared with SAR 20.6 million in Q2 2016 soaring 24.4% YoY, while slumping 8.3% QoQ from SAR 28 million in Q1 2017. This resulted in a net profit margin of 14.5% in Q2 2017 compared to 14.9% for Q2 2016. Therefore, the semiannual figure surged 28% to SAR 53.6 million compared with SAR 41.8 million in H1 2016.

Total revenues amounted to SAR 177 million in Q2 2017 compared with SAR 138 million in Q2 2016 soaring 28%, while shrinking slightly 2% from SAR 180 million in Q1 2017. Thus, the semiannual revenues climbed 16% to reach SAR 357 million compared to SAR 282 million in H1 2016.

The improvement in bottom line during Q2 2017 and H1 2017 was triggered by higher revenues resulting from the increase the number of patient nights, and the improvement of the contractual terms with some customers, in addition to the shutdown of Al Olaya Hospital due to an electric contact incident for the whole second quarter of 2016, and despite the increase in the doubtful debt provision. Meanwhile, the QoQ decline in net profit was driven by summer vacation, Ramadan and Eid Al-Fitr which coincided with Q2 2017, as well as the increase in direct costs as a result of recruitment Al Nuzha Hospital medical staff.

Gross profit concluded Q2 2017 at SAR 58.2 million compared to SAR 57.6 million in Q2 2016 growing slightly 1% YoY, while sliding 6.2% QoQ. Therefore, the gross margin shrank to 32.9% compared with 41.7% in Q2 2016. The semiannual gross profit climbed 7% posting SAR 120 million versus SAR 112 million in H1 2016.

The operating profit hit SAR 33.9 million in Q2 2017 compared to SAR 29.1 million in Q2 2016 surging 16.2% YoY, however operating profit fell 2.3% QoQ, thus the operating profit margin edged down to 19.2% compared with 21.1% in Q2 2016. Moreover, operating profit of H1 2017 leapt 20.4% reaching SAR 68.5 million versus SAR 56.9 million in H1 2016.

On the other hand, Al Hammadi announced preliminary non-binding discussions with National Medical Care Company (Care) to study the possibility of merging the two companies, resulting in the largest listed health care company with a capacity of 2,163 beds. The merger is expected to achieve cost synergies for the new entity and to strengthen bargaining power with suppliers and insurance companies. This integration will also result in wider geographic coverage within Riyadh, as well as strong market share position to compete for privatization opportunity.

The earning figure for Q2 2017 came in line with our estimate of SAR 24 million and analysts’ consensus of SAR 26 million. We believe Al Hammadi will continue to achieve a good growth rate in the coming years, especially with the launch of Al Nuzha Hospital which will significantly boost the overall operating capacity of Al Hammadi Hospitals, in addition to higher demand for medical services. In light of the above, we revised our future estimates and profit margins factoring in the continuity of the conservative provisioning policy, thus we maintain our valuation of Al Hammadi at SAR 41 per share.

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