Al Hammadi Company for Development and Investment

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1 Hammadi; We initiate with an Overweight recommendation, driven by expansion plans and an underpenetrated sector Hammadi Hospital, thirty years of healthcare experience: Al-Hammadi hospital- Olaya was established in 1985, in the city of Riyadh. The hospital provides comprehensive and specialized healthcare services. The Hospital employees around doctors and in excess of 600 medical staff. The Hospital has a total of 300 beds (including ICU beds for adults and children, and neonatal incubator), and a total of 74 outpatient clinics. The hospital provides a number of medical services to its outpatients and in patients. Expansion to increase bedding capacity by 343%: The company has launched two new hospital in the city of Riyadh namely: Al-Hammadi hospital- Al Suwiede: The new Hospital has a capacity of 428 beds ( including 128 ICU beds) and 64 outpatient clinics. The hospital started accepting patients from 1 st of, The financial impact from the expansion will be visible in 3Q Al-Hammadi hospital- Al Nuzha: The new hospital is expected to have a soft opening in Q The hospital will have a total of 600 bedding capacity, and 64 outpatient clinics. The company is expected to take its total in-patient bedding capacity to 1,328, whereas out-patient clinics are expected to reach 202. After opening the new Hospital in Al Suwiede, the current bedding capacity stands at 728, whereas outpatient clinics stands at 138. Large size hospital (beds >300), strategically limited: With reference to our thematic report 1 on the sector; a large size hospital is not the ideal business opportunity as compared to midsize hospital; considering the cost and differentiation payoff. However, based on our analysis, the ideal situation for large size hospital is to increase specialization clinics (as Hammadi is doing); which offsets the high payoff of large-size hospital. An underpenetrated Saudi healthcare sector: An underpenetrated Saudi healthcare sector: The Kingdom s healthcare is among the most promising investment avenues. Historically the growth in the sector was mainly associated with the increase in local population at a CAGR of 3.2% during 0-10; which is expected to increase at a CAGR of 2.0% over On the other hand, according to World Health Organization(WHO) estimates, the Kingdom s spending on healthcare reached at 3.2% of GDP in 2013.It should be noted that the Kingdom s healthcare spending to GDP ratio is almost similar to other GCC members but low in comparison with most developed countries. Although the local government is increasing its spending on medical healthcare, the sector is still lagging with; 22 beds per 10,000 population 9.4 physicians available per 10,000 population 21 nurses & midwives per 10,000 population. The combination of these factors indicates the Kingdom has ample room to make further developments in these areas; while comparing with global and regional averages. Valuation Recommendation Overweight Current Price* (SAR) New Target Price (SAR) 56.3 Upside / (Downside) 10.8% Key Financials SARmn (unless specified) FY14 FY15E FY16E Revenues Growth % 11.0% 30.7% 37.5% Net Income Growth % 15.7% 2.8% 49.5% EPS Key Ratios *prices as of 31 st Aug 2015 Source: Company reports, Aljazira Capital SARmn (unless specified) FY14 FY15E FY16E Gross Margin 44.7% 45.5% 45.8% EBITDA Margin 30.1% 28.6% 31.4% Net Margin 26.8% 21.0% 22.9% P/E P/B EV/EBITDA (x) ROE 9.8% 9.6% 13.6% ROA 6.1% 6.3% 9.6% Dividend Yield 2.0% 2.0% 2.5% DPS Source: Company reports, Aljazira Capital Hammadi Revenue and Net income Revenue-LHS Al-Hammadi Revenue Breakup Room Charges Other 11% 11% Net Income-LHS Source: Company Financials Doctors Fee Al-Hammadi Investment and development looks set to benefit from the current undersupply position in the healthcare industry. The company with its two new hospital will be able to increase its bedding capacity by 340% after the completion of Al-Hammadi Laboratory 17% 39% Hospital- Al Nuzha. The company is currently trading at a Trailing 12months PE of 44.53x against industry average of 26.83%, this we believe is due the strong growth potential of the stock. Our 12month price target of SAR 56.3/share against market price of SAR Pharmacy 21% Source: Company Financials 50.85, gives us a potential upside of 10.8%.We initiate our coverage on Al-Hammadi 1 development and investment company, with an Overweight recommendation. 1 Healthy outlook for Health investors Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa

2 Valuation Our DCF based valuation methodology is based on 10 - year explicit cash flows to reduce the sensitivity of our valuation to terminal value with the following key assumptions; Terminal growth rate is taken at 2.75%. 2-year weakly raw beta of (Bloomberg); in order to reduce the impact of volatility. Risk free rate is taken at 3.33%. KSA total market return is taken at 13.84% from Bloomberg. Hence, the equity risk premium is calculated at 10.5%. Capital Assets Pricing Model (CAPM) is used to calculate cost of equity at 14.6%. Cost of debt is taken at 3%. Weighted average cost of capital (WACC) is calculated at 11.6%. DCF based valuation methodology Discounted Cashflow Valuation (SAR Mn) Terminal Value EBITDA ,057 Taxes paid Net working capital changes (31) (49) (46) (62) (46) (27) (42) (45) (54) (39) Capex (185) (25) (25) (25) (25) (25) (25) (25) (25) (26) FCF (31) ,025 11,910 Discount Factor Discounted FCF (30) ,216 Cumulative discounted FCF 6,914 Net Debt (2014A) 153 Equity value 6,761 Number of shares 120 Target Value (SAR) 56.3 Source: Aljazira capital Based on our DCF valuation, our 12month price target for Al-Hammadi Company stands atsar 56.3/share, against current market price of SAR 50.85/share, we initiate our coverage on the company with an Overweigh reccomendation The table below highlights the sensitivity of Al-Hammadi Development and invesment DCF based 12-month price target with different terminal growth & WACC. Sensitivity Analysis growth WACC 10% 11% 11.6% 13% 14% 15% 1.7% % % % % Source: Aljazira capital 2

3 Company Al Hammadi Company for, has been operating in the healthcare sector for the last 30 years. The company s prime activity is the management and operation of Al-Hammadi Hospital-Olaya and Al-Hammadi Hospital-Suweidi. Al-Hamadi hospital Olaya was established in 1985 in the Olaya area in the city of Riyadh. Whereas, Al-Hammadi Hospital-Suweidi, commenced commercial operation on 1 ST, the hospital is located in the Southern region, in the city of Riyadh in area Al-Suweidi. The Company s other expansion is Al Hammadi Hospital-Al- Nuzha, which according to the company is expcted to be operation during 1Q The management initially was planning to build the new hospital with 428 bedding capacity, however the revised panned by management has upgraded the number of Major Shareholders 59% 10% 10% 21% Abdulaziz Bin Muhammad Hammad Alhammadi Jadwa Healthcare Opportunities Co Saleh Bin Mohammad Al Hammadi Other Source: Tadawul beds to 600 and 64 outpatient clinics. The new expansion is expected to take the total bedding capacity to 1,328 beds. The hospital provides multiple healthcare services as highlighted in table Alhammadi-Olaya established, 8-converted from a limited Liabilty to with a share capital of SAR 4mn a closed Joint Stock company, 2014-IPO, with a share capital of SAR 300mn Increased share capital to SAR 750mn. 4- coverted to limited Liability company, with a share capital of SAR 50mn 2012-Increased share capital to SAR 420mn then to 2013-Increased Share capiatl to SAR 525mn Share capital increased to SAR 120, Al-Hammadi Hospital Suweidi. commensces operationsa Table 01:Al-Hammadi Hospital Branches Name of Hospital In-Patient Beds Out-Patient Clinics Services Commencement date Al-Hammadi Hospital- Olaya, Riyadh Al-Hammadi Hospital-Al Suwieidi, Riyadh Al-Hammadi Hospital- Nuzha, Riyadh 300, 17 ICU( intensive care units, 25 beds for neonatal intensive care unit, 35 beds for children s ICU 428, 13 large operation theatres, operation theater for cardiac catherization, 2 rooms for upper and lower endoscopy, room for kidney and urethral stones removal 600, 13 large operation theatres, operation theater for cardiac catherization, 2 rooms for upper and lower endoscopy, room for kidney and urethral stones removal Cardiology and Cardiac Surgery, Cosmetology and Plastic Surgery, Dentistry, Dermatology, Digestive System Diseases, Ear Nose and Throat, Emergency, Endocrinology and Diabetes, General Surgery,Internal Medicine, Kidney Diseases, Neurological Medicine and Surgery, Obstetrics and Gynecology, Ophthalmology, Orthopedics and Spinal Cord, Pediatric Medicine and Surgery, Psychiatry, Rheumatolog Thoracic Medicine, Urology. Similar services as provided in Al Olaya branch Similar services as provided in Al Olaya branch st of Q Source: Company prospectus 3

4 Expansion Plans driving growth: On the back of the new expansion, we believe the company s net income is expected to grow at a 4 Year CAGR of 29.3%, on the back of 4 CAGR of 30.6% in revenues. The company s total bedding capacity is expected to increase to 1,328beds from 300 beds in Given the low ratio of 2.2 beds per 1000 population, and the heavy investment by the government to support the healthcare sector, the sector looks ready to reap the benefits from the current under supply position. The government is making a concentrated effort in improving the healthcare facility and increasing the number of beds. For 2015, the government has earmarked SAR 160bn for healthcare and social affairs. In-Patients Beds Al-Suwiedi Branch Addtion of 428beds and 64 clinics In-Patient Beds Al-Nuzha Branch Addtion of 428beds and 64 clinics Out-Patient Clinics Source: Company Prospectus Revenue and net income growth 1 60% % % % 20% 10% 0 0% Revenue-LHS Net Income-LHS % Growth in Revenue-RHS % Growth in Net Income-RHS Source: Company prospectus, Aljazira Research In addition we expect the company to show healthy improvement in revenue per bed and claims per visit. Revenue per bed in 2018 is expected to show a 4 year CAGR of 6%. Dividend payment to supplement capital gains The company for the year 2014 paid a dividend of SAR 1.0/share, translating into a payout ratio of 58%.The company has generated strong cash flow to support its dividend payment. The company s Operating cash flow in 2014 stood at SAR 156mn, depicting a CFO/NI 2 ratio of 121%. From 2010 to 2014 average CFO/NI ratio stood at 123%. Going forward we expect the CFO/NI ratio to stand above 100%. Along with the decrease in CAPEX 3, after the completion of the Al Nuzha hospital will leave the company with sufficient cash to maintain its dividend ratio. We expect cash flow from operation to grow at 4 year CAGR of 23.87%. Dividend Payout Ratio % % % 53% % % % % DPS Payout ratio Source: Company Report, Aljazira Researc CFO/Ni ratio In Mn SAR 125% % % % 105% % 50 95% - 90% Cash Flow from Operations CFO/NI Source: Company prospectus, Aljazira Research 2 Cash Flow from Operation/net income 3 Capital Asset Expenditure 4

5 Key financial data Amount in SARmn, unless otherwise specified F 2016F 2017F 2018F 2019F Revenue , , ,590.0 Revneue Growth (%) 15% 15% 11% 31% 38% 30% 25% 13% Cost of Revenue, Total Gross Profit Selling/General/Admin. Expenses, Total Total Operating Expense , ,076.1 Operating Income Interest Inc.(Exp.),Net-Non-Op., Total Other Non-Operating Income (Expense) Net Income Before Taxes Provision for Income Taxes Net Income After Taxes Net Income Growth (%) 5% 18% 16% 3% 49% 18% 55% 38% Basic EPS Including Extraordinary Items Balance Sheet Assets (SAR Millions) Cash and Short Term Investments Accounts Receivable - Trade, Net Receivables - Other Total Inventory Prepaid Expenses Total Current Assets Property/Plant/Equipment, Total - Net , , , , , , ,380.3 Total Assets , , , , , , ,193.2 Liabilities (SAR Millions) Accounts Payable Payable/Accrued Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Income Taxes Payable Other Payables Total Current Liabilities Total Long Term Debt Other Liabilities, Total - Pension Total Liabilities Shareholders Equity (SAR Millions) Common Stock, Total ,.0 1,.0 1,.0 1,.0 1,.0 Statutory Reserve Retained Earnings (Accumulated Deficit) Total Equity , , , , , ,885.3 Total Liabilities & Shareholders' Equity , , , , , , ,193.1 Cash Flow (Mn SAR ) Cash from Operating Activities Cash Flow-Investing Activities (SAR Millions) Cash from Investing Activities (265.5) (391.4) (376.3) (185.0) (25.0) (25.0) (25.0) (25.0) Cash Flow-Financing Activities (SAR Millions) Net Change in Cash 28.3 (21.2) (180.9) (89.0) (146.5) (17.9) Net Cash - Beginning Balance Net Cash - Ending Balance Source: Company Reports, Aljaizra Research 5

6 RATIO ANALYSIS F 2016F 2017F 2018F 2019F Liquidity Current ratio Quick ratio Returns ROE 16.6% 19.0% 9.8% 9.6% 13.6% 15.1% 21.4% 26.4% ROA 11.2% 9.0% 6.1% 6.3% 9.6% 11.9% 18.1% 22.7% ROC 12.1% 9.6% 6.4% 6.6% 10.2% 12.9% 20.0% 24.8% Profitability Gross Margin 43.1% 42.7% 44.7% 45.5% 45.8% 42.2% 45.5% 49.3% Operating Margin 24.4% 25.8% 27.2% 23.3% 24.8% 21.9% 26.7% 32.3% Net Margin 24.9% 25.7% 26.8% 21.0% 22.9% 20.7% 25.7% 31.2% EBIT Margin 24.4% 25.8% 27.2% 23.3% 24.8% 21.9% 26.7% 32.3% EBITDA Margin 28.0% 29.0% 30.1% 28.6% 31.4% 27.9% 31.6% 36.7% Leverage Total debt/capital 27% 50% 35% 32% 25% 15% 6% 6% Total debt/assets 25% 47% 33% 30% 24% 14% 6% 5% Total debt/equity 37% 99% 53% 47% 34% 17% 7% 6% Net debt/equity 26% 91% 12% 20% 15% 9% 0% -10% Net debt/ebit (0.37) Net debt/ebitda (0.32) Net debt/fcf 6.60 (26.40) 2.86 (8.87) (0.36) Interest coverage (EBIT) (54.29) (373.67) (1,223.79) Interest coverage (EBITDA) (62.29) (419.00) (1,354.44) Turnover Inventory turnover Receivables turnover Payables turnover Total asset turnover Fixed assets turnover Valuation PE PBV EV/EBITDA EV/EBIT Dividend Yield 0.0% 0.0% 2.0% 2.0% 2.5% 3.4% 4.9% 5.4% Source: Company Reports, Aljaizra Research 6

7 RESEARCH DIVISION AGM - Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Analyst Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa Analyst Sultan Al Kadi s.alkadi@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General manager - brokerage services and sales Ala a Al-Yousef a.yousef@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa lalmutawa@aljaziracapital.com.sa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. Al-Misbani a.almisbahi@aljaziracapital.com.sa AGM - Head of Institutional Brokerage Samer Al- Joauni s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated Overweight will typically provide an upside potential of over 10% from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated Underweight would typically decline by over 10% from the current price levels over next twelve months. 3. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated Neutral is expected to stagnate within +/- 10% range from the current price levels over next twelve months. 4. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company. 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