Al Razzi Holding Company

Transcription

1 4 February 214 Analyst Analyst Title Recomm. Subsidiaries, 213 Stake (%) Shifa Healthcare 1% Warba Medical Supplies 8% Dawaa Manufacturing 99% Environmental Industries Held through Shifa Healthcare NR Per Share Value (KWD).15 99% Bayan Medical 77% Ibn Sina International 8% Associates, 213 Stake (%) Al Nawadi 2% IMC Holding Company 2% Al Razzi Holding Company Higher government spending and acquisitions to drive growth We expect Al Razzi Holding Company (Al Razzi) to benefit from its strategic investments in the healthcare industry. Furthermore, Al Razzi is well poised to benefit from increased healthcare spending in Kuwait and conscious efforts by the government to boost private sector participation via Public Private Partnerships (PPP). Moreover, the management continues to pursue high growth opportunities. It acquired a 33% stake in Sama Educational Company in May 213 (a fast growing company in education sector); this is likely to bolster profitability as well as diversify earnings, in our opinion. Based in Kuwait, Al Razzi Holding Company is a private specialized healthcare investment company. Its provides medical and pharmaceutical services, healthcare provider services and health information management and insurance services via its subsidiaries. Strategic investments in the high growth healthcare sector boosted the company s revenues at a CAGR of 13.4% over FY29 FY213; its operating profit improved from KWD.3mn in FY29 to KWD1.6mn in FY213. In addition to being a dominant player in the healthcare sector, Al Razzi is diversifying operations into other sectors. As of March 213, the company s other operations included managing and processing electronic waste via subsidiary Environmental Industries Company, and providing health club and spa services via its 2% stake in Al Nawadi Holding Company. In May 213, Al Razzi acquired a 33% stake in Sama Educational Company from NBK Capital. Sama Educational Company caters to the educational needs in secondary school levels. The sector has high growth prospects as it has been receiving government focus with increased investments and reforms to improve the quality of education in Kuwait. Valuation: We arrived at per share value of KWD.15 for Al Razzi by using two valuation methodologies: DCF and relative valuation (PER and EV/EBITDA). We assigned 5% weightage to the DCF valuation and 25% weightage to PER and EV/EBITDA each. DCF valuation is based on cost of equity of 2.% and terminal growth rate of 4.%. For relative valuations, we assigned PER and EV/EBITDA multiples of 17.9x and 15.x, respectively. Revenue (KWD ) and EBITDA Margin (%) EBIT (KWD ) and EPS (KWD) 25, 15.% 3,.2 2, 13.% 2,5 15, 1, 11.% 9.% 2, 1,5 1,.1. 5, 7.% 5 5.% -.1 Revenues EBITDA Margin EBIT EPS (RHS) Source: Company Data, KFIC Estimates Source: Company Data, KFIC Estimates 1

2 4 February 214 Revenue trend (KWD ) 16, 12, Healthcare Exp (as of 21) Govt Exp Pvt Exp 8, 4, 5.% 4.% 3.% 2.% 1.%.% FY211 FY212 FY % 8.4% 81.1% 73.% 66.% 71.1% 22.5% 19.6% 18.9% 27.% 34.% 28.9% Qatar Kuwait Oman UAE KSA Bahrain Healthcare expenditure to GDP (%) EBITDA Margin (%) 2.% 15.% 1.% 5.%.% FY211 FY212 FY213 Focused investments in healthcare driving strong growth even during economic downturns Al Razzi is actively pursuing growth strategies in the fast-growing healthcare sector in GCC. Since its establishment in 24, the company has acquired several businesses across the healthcare value chain. In fact, Al Razzi now has diversified interests ranging from pharmaceuticals and hospitals to ambulatory services, information technology and insurance. Strong growth in all these sub-segments enabled the company to report a CAGR of 13.4% in revenues over FY29-FY213, resisting the economic downturn of Increase in government initiatives expected to boost growth Al Razzi remains well poised to take advantage of the increasing opportunities in Kuwait s healthcare sector. Its operations in the healthcare sector are integrated, ranging from pharmacy supplies, hospitals, ambulatory services to health information management and insurance services. This provides an edge to the company to utilize the upcoming growth opportunities in the healthcare sector. Healthcare spending in Kuwait is expected to remain high as there is an urgent need to address the shortfall in facilities. Kuwait faces issues of under supply of hospital beds, with just 2 beds per 1, people (compared to 2.2 beds in Saudi Arabia and 3 beds in the US and UK each). This is a serious shortfall considering the rate of growth in Kuwait s population and higher cases of chronic diseases such as hypertension, obesity and diabetes. The current healthcare expenditure is estimated to be around 2.7% of GDP, which is well below that of developed countries. Kuwait s healthcare expenditure is expected to be at KWD1.4bn in 212, with an annual increase of 5.3% over Business Monitor International expects expenditure to increase at a CAGR of 9.7% to KWD2.2bn by 217. Sama acquisition diversifies and augments growth prospects In May 213, Al Razzi announced acquisition of a 33% stake in Sama Educational Company KSCC (SAMA) from NBK Capital. SAMA was established in 28 and operates a diversified portfolio of educational assets in the K-12 level. Since inception, it has doubled its capacity, and student count has increased from around 2,4 to over 4, as of May 213. Education is currently an attractive industry in the MENA region, with increasing demand for new enrollments, a decline in dropout rates, increase in demand for private sector education and higher government spending. In addition, the business model remains attractive with high revenue visibility, lower working capital requirement and higher demand due to under supply of education facilities in the region. Furthermore, like healthcare, education remains a sector that is resistant to economic downturns. Cash conversion cycle (no. of days) Yiaco Al Razzi Al-Mowasat Margins to remain steady EBITDA margins improved from 5.4% in FY29 to 12.% in FY213. This was mainly due to higher operating efficiencies. EBITDA margins for FY213 are higher compared to Yiaco Medical Co KSCC (Yiaco) s 7.6%, but lower than Al-Mowasat Health Care Co. (Al-Mowasat) s 18.6%. Kuwait s government plans to intervene in the private healthcare sector, forcing service providers to lower treatment costs and service fees that are much higher than that offered by the public sector. We believe this could restrict margin expansion, resulting in EBITDA margins stabilizing at around 12.5% by FY215E FY211 FY212 FY213 Source: Company Data, WHO, KFIC estimates Healthy balance sheet provides support Al Razzi boasts of a debt-free balance sheet as of FY213. Furthermore, it had adequate cash on its balance sheet (KWD22.8mn in FY213), providing Al Razzi with sufficient funds to acquire new companies. Its good performance record would help the company easily raise debt for potential acquisitions or capital expansions. Despite an increase in inventory (by four days) and debtor days (by 11), cash conversion cycle for FY213 stands comfortable at 11 days, which is marginally higher compared to Yiaco s 17 days and below Al Mowasat s 25 days. 2

3 4 February 214 Historical Financial Performance Income Statement (KWD, ) FY211 FY212 FY213 Revenues 1,648 13,16 14,58 EBITDA 829 1,498 1,742 EBIT 639 1,349 1,555 Net Income -3,732 1,41 2,562 EPS Balance Sheet (KWD, ) FY211 FY212 FY213 Cash 18,677 21,677 22,765 Curr. Assets 26,558 29,158 32,326 Debt Equity 41,358 43,292 45,28 Revenues reports annual growth of 13.4% over FY29 FY213 Al Razzi s revenues resisted the economic downturn in Kuwait during 29 1 due to the high quality of its investments in the healthcare services sector and incidences of chronic diseases in the country. The company s revenues grew to KWD14.5mn at end- FY213 (year ending March 31) from KWD8.8mn in FY29. Higher level of healthcare spending, coupled with an increase in PPP, is expected to help Al Razzi report doubledigit growth. Efficiencies from integrated operations helping margin expansion Efficiencies in operating costs and higher margins helped Al Razzi s operating profit improve from KWD.3mn in FY29 to KWD1.6mn in FY213. EBIT margins expanded from 3.9% in FY29 to 1.7% in FY213. However, net income remained volatile due to losses and impairment costs on sale of various available-for-sale investments over FY29 FY211. We expect the acquisition of Sama Educational Co. to boost earnings while EBITDA margins to remain stable at 12 13% levels by FY216E. Return Ratios FY211 FY212 FY213 ROA -8.1% 3.1% 5.3% ROCE 1.5% 3.2% 3.5% ROE -8.7% 3.3% 5.8% Return Ratios Al Razzi s steady revenue growth, coupled with margin expansion, helped boost return ratios. Return on assets (RoA) peaked at 5.3% in FY213 compared with 2.4% in 21 and 3.1% in FY212. Return on Equity (RoE) increased to 5.8% in FY213 from 2.6% in FY21 and 3.3% in FY212. However, the ratios remain volatile due to net income volatility. Cash Flows (KWD, ) FY211 FY212 FY213 Capital Exp CFO 431 1, Cash Flow Analysis Al Razzi s capital expenditure (KWD.2mn in FY213), as a percentage of sales, increased from 1.% in FY211 to 1.3% in FY213. Operational cash flow fell from KWD.4mn in FY211 to KWD.3mn in FY213. Source: Company Data 3

4 4 February 214 Revenue (KWD ) 25, 2, 15, 1, 5, Net Income (KWD ) 6, 4, 2, -2, -4, -6, Gross Profit Margin 35.% 3.% Current Ratio 14.x 12.x 1.x 8.x 6.x 25.% 4.x 2.x 2.%.x Return on Equity Return on Assets 1.% 1.% 8.% 8.% 6.% 6.% 4.% 4.% 2.% 2.%.%.% -2.% -2.% -4.% -4.% -6.% -6.% -8.% -8.% -1.% -1.% Source: Company Data 4

5 4 February 214 SWOT Analysis Strengths Weakness Strong exposure to highly potential healthcare sector. This helped revenues grow at a CAGR of 13.4% over FY29- FY213. Growing exposure to other attractive opportunities. In May 213, Al Razzi acquired a 33% stake in Sama Educational Company. This is expected to strengthen earnings growth. Strong balance sheet, with no debt and high cash balance. This should continue support future growth avenues The company s net profit remains volatile due to fluctuations in gain/loss on sale or impairments on available-for-sale investments. Despite a strong balance sheet, Al Razzi is slow in terms of expansion via capex/acquisitions. Opportunities Threats Healthcare spending in Kuwait is expected to increase at a CAGR of 9.7% over Higher demand for healthcare services due to high incidences of chronic diseases Education has high growth prospects and has been receiving government focus with increased investments and reforms Kuwait s government s interference in the private health sector to lower fees could negatively impact margins of service providers. Higher competition from regional players could result in a price war and add to margin pressure in the private pharmacy sector. Recent Developments 5 May 213: Al Razzi Holding Company purchased stake in Sama Educational Company KSCC from NBK Capital. Business Description: Established in 24, Al Razzi Holding Company, KSC, headquartered in Kuwait, is a specialized healthcare investment company. Its activities are compliant with the Sharia principles and can be divided into three categories: (i) Healthcare medical and pharmaceutical services, which includes operations in medical and pharmaceutical value chain, ranging from manufacturing to wholesaling and retailing; (ii) Healthcare provider services, with services like hospitals, ambulatory care, and free standing clinical support services; and (iii) Health information management and insurance services, which includes healthcare information technology, health insurance, and third party administration activities. Al Razzi is a private company having 125 shareholders, with Global Investment House, Wafra International Investment Company and Gulf Bank being the three major shareholders. 5