Feb 4, 2014 - healthcare spending in Kuwait and conscious efforts by the government ... caters to the educational needs
Kuwait Finance & Investment Company Equity Note 04 February 2014
Al Razzi Holding Company
Analyst Analyst Title
Higher government spending and acquisitions to drive growth
Recomm.
NR
Per Share Value (KWD)
0.15
Subsidiaries, 2013
Stake (%)
Shifa Healthcare
100%
Warba Medical Supplies
80%
Dawaa Manufacturing
99%
Environmental Industries
99%
Held through Shifa Healthcare Bayan Medical
77%
Ibn Sina International
80%
Associates, 2013
Stake (%)
Al Nawadi
20%
IMC Holding Company
20%
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 2013 (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 FY2009–FY2013; its operating profit improved from KWD0.3mn in FY2009 to KWD1.6mn in FY2013. In addition to being a dominant player in the healthcare sector, Al Razzi is diversifying operations into other sectors. As of March 2013, 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 20% stake in Al Nawadi Holding Company. In May 2013, 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 0.15 for Al Razzi by using two valuation methodologies: DCF and relative valuation (PER and EV/EBITDA). We assigned 50% weightage to the DCF valuation and 25% weightage to PER and EV/EBITDA each. DCF valuation is based on cost of equity of 20.0% and terminal growth rate of 4.0%. For relative valuations, we assigned PER and EV/EBITDA multiples of 17.9x and 15.0x, respectively.
Revenue (KWD ‘000) and EBITDA Margin (%)
EBIT (KWD ‘000) and EPS (KWD)
25,000
15.0%
3,000
20,000
13.0%
2,500
15,000
11.0%
10,000
9.0%
5,000
7.0%
500
0
5.0%
0
0.02
2,000
0.01
1,500
FY2011 FY2012 FY2013 FY2014E FY2015E FY2016E
Revenues
Source: Company Data, KFIC Estimates
EBITDA Margin
1,000
0.00
-0.01 FY2011
FY2012
FY2013 FY2014E FY2015E FY2016E
EBIT
EPS (RHS)
Source: Company Data, KFIC Estimates
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Kuwait Finance & Investment Company Equity Note 04 February 2014 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 2004, 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 FY2009-FY2013, resisting the economic downturn of 2009-10.
Revenue trend (KWD ‘000) 16,000 12,000 8,000 4,000 0 FY2011
FY2012
FY2013
Healthcare Exp (as of 2010) Govt Exp
77.5%
80.4%
81.1%
73.0%
66.0%
71.1%
Pvt Exp
22.5%
19.6%
18.9%
27.0%
34.0%
28.9%
UAE
KSA Bahrain
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Qatar Kuwait Oman
Healthcare expenditure to GDP (%)
EBITDA Margin (%) 20.0% 15.0% 10.0% 5.0% 0.0% FY2011
Yiaco
FY2012
Al Razzi
FY2013
Al-Mowasat
Cash conversion cycle (no. of days) 120 115 110 105 100 FY2011
FY2012
FY2013
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 1,000 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 2012, with an annual increase of 5.3% over 20092012. Business Monitor International expects expenditure to increase at a CAGR of 9.7% to KWD2.2bn by 2017. Sama acquisition diversifies and augments growth prospects In May 2013, Al Razzi announced acquisition of a 33% stake in Sama Educational Company KSCC (SAMA) from NBK Capital. SAMA was established in 2008 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 2,400 to over 4,000 as of May 2013. 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. Margins to remain steady EBITDA margins improved from 5.4% in FY2009 to 12.0% in FY2013. This was mainly due to higher operating efficiencies. EBITDA margins for FY2013 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 FY2015E. Healthy balance sheet provides support Al Razzi boasts of a debt-free balance sheet as of FY2013. Furthermore, it had adequate cash on its balance sheet (KWD22.8mn in FY2013), 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 FY2013 stands comfortable at 110 days, which is marginally higher compared to Yiaco’s 107 days and below Al Mowasat’s 250 days.
Source: Company Data, WHO, KFIC estimates 2
Kuwait Finance & Investment Company Equity Note 04 February 2014 Historical Financial Performance Income Statement (KWD, ‘000)
FY2011
FY2012
FY2013
10,648
13,106
14,508
EBITDA
829
1,498
1,742
EBIT
639
1,349
1,555
Net Income
-3,732
1,401
2,562
EPS
-0.007
0.003
0.006
Revenues
FY2011
FY2012
FY2013
Cash
18,677
21,677
22,765
Curr. Assets
26,558
29,158
32,326
0
0
0
41,358
43,292
45,028
Debt Equity
Return Ratios
Efficiencies in operating costs and higher margins helped Al Razzi’s operating profit improve from KWD0.3mn in FY2009 to KWD1.6mn in FY2013. EBIT margins expanded from 3.9% in FY2009 to 10.7% in FY2013. However, net income remained volatile due to losses and impairment costs on sale of various available-for-sale investments over FY2009–FY2011. We expect the acquisition of Sama Educational Co. to boost earnings while EBITDA margins to remain stable at 12–13% levels by FY2016E.
Return Ratios
FY2011
FY2012
FY2013
ROA
-8.1%
3.1%
5.3%
ROCE
1.5%
3.2%
3.5%
ROE
-8.7%
3.3%
5.8%
Al Razzi’s steady revenue growth, coupled with margin expansion, helped boost return ratios. Return on assets (RoA) peaked at 5.3% in FY2013 compared with 2.4% in 2010 and 3.1% in FY2012. Return on Equity (RoE) increased to 5.8% in FY2013 from 2.6% in FY2010 and 3.3% in FY2012. However, the ratios remain volatile due to net income volatility.
Cash Flow Analysis
Cash Flows (KWD, ‘000)
Al Razzi’s revenues resisted the economic downturn in Kuwait during 2009–10 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 endFY2013 (year ending March 31) from KWD8.8mn in FY2009. 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
Balance Sheet (KWD, ‘000)
Revenues reports annual growth of 13.4% over FY2009– FY2013
FY2011
FY2012
FY2013
Capital Exp.
103
155
185
CFO
431
1,920
285
Al Razzi’s capital expenditure (KWD0.2mn in FY2013), as a percentage of sales, increased from 1.0% in FY2011 to 1.3% in FY2013. Operational cash flow fell from KWD0.4mn in FY2011 to KWD0.3mn in FY2013.
Source: Company Data 3
Kuwait Finance & Investment Company Equity Note 04 February 2014 Revenue (KWD ‘000)
Net Income (KWD’000) 6,000
25,000
4,000
20,000
2,000 15,000 0 10,000 -2,000 5,000
-4,000
0
-6,000 FY2011
FY2012
FY2011
FY2013 FY2014E FY2015E FY2016E
Gross Profit Margin
FY2012
FY2013 FY2014E FY2015E FY2016E
Current Ratio 14.0x
35.0%
12.0x 10.0x 30.0% 8.0x 6.0x 25.0%
4.0x 2.0x 0.0x
20.0% FY2011
FY2012
FY2011
FY2013 FY2014E FY2015E FY2016E
10.0%
10.0%
8.0%
8.0%
6.0%
6.0%
4.0%
4.0%
2.0%
2.0%
0.0%
0.0%
-2.0%
-2.0%
-4.0%
-4.0%
-6.0%
-6.0%
-8.0%
-8.0%
-10.0%
-10.0% FY2012
FY2013 FY2014E FY2015E FY2016E
Return on Assets
Return on Equity
FY2011
FY2012
FY2013 FY2014E FY2015E FY2016E
FY2011
FY2012
FY2013 FY2014E FY2015E FY2016E
Source: Company Data
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Kuwait Finance & Investment Company Equity Note 04 February 2014 SWOT Analysis Strengths • Strong exposure to highly potential healthcare sector . This helped revenues grow at a CAGR of 13.4% over FY2009FY2013. • Growing exposure to other attractive opportunities. In May 2013, Al Razzi acquired a 33% stake in Sama Educational Company. This is expected to strengthen earnings growth.
Weakness • 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.
• Strong balance sheet, with no debt and high cash balance. This should continue support future growth avenues
Opportunities • Healthcare spending in Kuwait is expected to increase at a CAGR of 9.7% over 2012–17. • 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
Threats • 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 • 05 May 2013: Al Razzi Holding Company purchased stake in Sama Educational Company KSCC from NBK Capital.
Business Description: Established in 2004, 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.
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