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MENA HealthcareSector Report | 18 September, 2013

MENA HealthcareNo Better Time to be Overweight

S e c t o r C o v e r a g e

S e p t e m b e r 1 8 2 0 1 3

Mohammad Kamal [email protected] +9714 507 1743

Dahlia Sabaayon, CFA Arqaam Capital Research Offshore s.a.l

MENA Healthcare No better time to be overweight

Lifestyle-related diseases are highly prevalent in MENA, and particularly in KSA and the UAE: sedentary lifestyles and poor dietary habits linked to diabetes, cardiovascular diseases, and cancer have rendered KSA and UAE exposed to elevated incidence rates of key diseases. As a general data point, the obesity rate among Saudi adults, according to the WHO, is 3x the global rate, on par with the US (36%) and ahead of MENA (<30%). The UAE faces a similar situation, with 36% of the population classified as obese. Perhaps most striking is the incidence of diabetes among young (<39) residents in KSA, which stands at >2x the US rate at 32% of the overall diabetic population (14% US).

Chronic underinvestment and over-expenditure: The KSA bed/1,000 ratio of 2.2 (1.7 beds provided by the government, 0.5 by the private sector) is below the global average of 3.0, and far below the average of 5.5 in developed countries. The UAE is structurally similar, at 1.9 beds/1,000 in 2011. National spending on healthcare in KSA and UAE has been between 4.0% and 2.5% of GDP over the past 5 years, roughly in-line with the MENA average, but low by developed market standards (18% in the US, 11% in France and Germany, 8% in the UK). Conversely, the expenditure on medical treatments abroad for KSA and UAE nationals has cost both countries an average of USD 5bn in the past 10 years, as a consequence of insufficient domestic healthcare infrastructure and a shortage of qualified specialised doctors. Healthcare policy in both countries has stimulated private sector investment in capacity, while new regulation regarding insurance cover should prove a sizable catalyst. A combination of (i) reforms, (ii) public spending packages, and (iii) special lending terms targeting new medical facilities have spurred private sector participation. In the UAE, the introduction of mandatory health cover in Abu Dhabi in 2007 catalysed a 4x growth in inpatient claims, and 8x in outpatients. Dubai and the Northern Emirates are due to follow suit, releasing 50% in additional insured patients which to date have met treatment costs out-of-pocket. Discounted valuation despite superior quality: We are positive on NMC UH (Buy, GBp 440), MOUWASAT AB (Buy, SAR 103) and DALLAH AB (Buy, SAR 88). We find fundamentals priced in at current price for CARE AB (Hold, SAR 48) and ANH LN (Hold, GBp 840). KSA and UAE healthcare plays offer value in an EM context, as the sector trades at a 20% discount to EM peer fwd P/E, while generating stronger equity returns (1.5x), a 500bps EBITDA margin differential, and industry ROIC that is 6% higher on average. Risks: Geopolitics, sufficiency of government spending packages, and adoption of key regulation.

Bloomberg code MOUWASAT AB

Company name Al Mouwasat Medical Services Company Price target SAR 103

Rating 30% upside, Buy

Bloomberg code DALLAH AB Company name Dallah Healthcare Holding Company

Price target SAR 88


Bloomberg code NMC LN Company name NMC Health

Price target GBp 440


Bloomberg code CARE AB Company name National Medical Care Company

Price target SAR 48

Rating 12% downside, Hold

Bloomberg code ANH LN Company name Al Noor Hospitals Group

Price target GBp 840

Rating 0% upside, Hold

© Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

Summary of recommendations

September 18 2013

MENA – Healthcare and Pharmaceuticals

Healthcare and Pharmaceuticals © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2

Contents Summary of recommendations ....................................................................................... 3

Key Performance Indicators ............................................................................................ 4

Valuation: ........................................................................................................................ 5

KSA and UAE Healthcare ................................................................................................. 6

The healthcare opportunity in KSA ................................................................................. 7

Key private healthcare groups in KSA ........................................................................... 13

The healthcare opportunity in the UAE ........................................................................ 14

Key UAE healthcare indicators ...................................................................................... 20

Al Mouwasat Medical Services Co................................................................................. 21

Dallah Healthcare Holding Co........................................................................................ 30

NMC Health ................................................................................................................... 39

National Medical Care Co. ............................................................................................. 50

Al Noor Hospitals Group ................................................................................................ 59

September 18 2013



Summary of recommendations

Exhibit 1: Summary of recommendations

Company Price target Rating Up (down) side ADTV, USDmn EV*, USDmn Index Free float

Dallah Healthcare SAR 88 Buy 40% 11.7 707.1 SASEIDX 37.9%

Mouwasat SAR 103 Buy 30% 3.4 1,099.4 SASEIDX 43.8%

National Medical Care SAR 48 Hold (12%) 12.5 607.4 SASEIDX 38.3%

NMC Health GBp 440 Buy 40% 0.6 983.4 ASX 33.0%

Al Noor Hospitals Group Plc GBp 840 Hold 0% 0.8 1,012.8 ASX 29.1%

Company EV/EBITDA FY 14e P/E FY 13e P/E FY 14e P/E FY 15e P/B FY 13e RoE Div yield

Dallah Healthcare 14.0x 26.0x 19.3x 15.7x 2.5x 10% 1.7%

Mouwasat 12.2x 18.1x 15.2x 14.2x 4.1x 23% 1.7%

National Medical Care 15.7x 24.8x 23.4x 20.9x 2.9x 12% 2.2%

NMC Health 9.8x 13.7x 12.7x 11.5x 2.4x 18% 1.5%

Al Noor Hospitals Group Plc 10.0x 23.5x 17.5x 17.2x 8.8x 37% 1.7%

Source: Company Data, Arqaam Capital Research *at recent market prices

Dallah Healthcare (Buy, SAR 88): direct exposure to premium segment of KSA private healthcare sector. 2x expansion in bed capacity should translate into FY 13-18e EPS CAGR of 20%, which is further supported by double-digit growth in pharmaceuticals business (17% 5-yr revenue CAGR). Current market valuation implies 15% discount to EM peers on FY 14/15e EPS. We believe the market is overlooking the role of bed capacity growth on EPS at current multiples. We initiate with a Buy rating and SAR 88 FVE.

Mouwasat (Buy, SAR 103): unique positioning vis-a-vis KSA oil industry communities. Key growth catalysts overlooked at current valuation: 85% bed capacity increase over 5 years, roll out of facilities in dense, underserviced urban centers (Riyadh), and upward re-pricing of agreements with insurers. Mouwasat currently trades at 15.2x FY 14e EPS vs. 17.6x and 19.3x for regional and local peers, implying discounts of 15% and 20%, respectively. We believe the stock should re-rate and trade in-line with sector multiples, at the very least. We initiate with a Buy rating and SAR 103 FVE.

NMC Health (Buy, GBp 440): Well-positioned for mandatory health cover in Dubai & Northern Emirates, bed capacity in utilization should improve as a result. Bed capacity roll-out (+100%) should drive revenue CAGR of 16%. NMC holds the cheapest valuation profile within our healthcare coverage space (12.7x FY 14e EPS, 9.8x EV/EBITDA), despite superior healthcare EBITDA margins of 28% (vs. 25% regional peers, 20% EM). We value NMC at GBp 440/share, implying c. 40% in upside potential from current price, using DCF, and initiate with Buy.

National Medical Care- CARE (Hold, SAR 48): Pure play on the middle income segment of the Saudi healthcare sector. 48% bed capacity additions to bolster market share, going forward, and support 5-yr revenue CAGR of 9% on a rise in inpatient as well as outpatient visitation. Valuation: We initiate with a Hold recommendation and SAR 48 FVE. At 23.4x FY 14e EPS, CARE trades at 35% and 20% premiums to regional and local peers. Valuations are stretched but tolerable, given the business’s strong domestic positioning (16% Riyadh market share in FY 14e).

Al Noor Hospitals (Hold, GBp 840): Leading private healthcare provider in Abu Dhabi, dominant share of inpatient (39%) and outpatient (35%) market. Modest revenue growth outlook (5% CAGR 5-yr), medical staff costs to impact margins. Market valuation adequately captures fundamentals at c. 24x/18x FY 13e/14e P/E. We initiate coverage with Hold and GBp 840 FVE.

September 18 2013



Key Performance Indicators

Exhibit 2: Summary of key operating and performance indicators across the UAE and KSA healthcare coverage space

NMC Dallah Mouwasat CARE Noor

Operations

Location- country UAE KSA KSA KSA UAE

Location-city Abu Dhabi, Dubai, Sharjah Riyadh Eastern province, Riyadh (FY 13e) Riyadh Abu Dhabi, Oman

Number of hospitals 7 2 6 2 3

Number of clinic centers na 284 376 175 na

Number of other centers 3 na 2 dispensaries 4 dispensaries 12 medical centers

Obstetrics Y Y N N N

Paediatrics N Y N N N

Owns land under premises? N Y Y Y N

bed count 230 352 594 420 225

bed count incoming, % 109% 105% 83% 48% 0%

Doctors employed 382 113 429 237 434

Inpatient capacity/annum

57,693

52,539

86,724

24,795

45,880

outpatients treated, FY 12A

1,853,655

684,000

1,550,835

523,258

1,505,518

Outpatients/doctor

4,853

6,053

3,615

2,208

3,469

Pharmaceuticals capability? Y Y Y Y N

Pharmaceuticals/revenues 11% 8% 19% 21% na

Other ancillary? O&M O&M N MDU Y

Other ancillary % revenues 1% 3% na 3% 3%

Revenues and receivables

Insured patients, % of revenues 82% 46% 40% 34% 91%

Direct payment patients, % of revenues

18% 20% 40% 33% 9%

Govt entities, % of revenues 60% 3% 40% 20% 70%

Top 5 clients >40% revenues Y N Y Y Y

Receivables days

130 92 99 134 93

working capital/revenues 39% 22% 21% 32% 12%

Returns, growth and margins

RoE 18% 10% 23% 12% 37%

Rev CAGR 12% 16% 13% 9% 5%

EPS CAGR 15% 20% 15% 10% 8%

D/E 84% 4% 19% 12% 0%

GPM (%) 35% 42% 48% 24% 41%

EBITDAM (%) 17%* 22% 30% 24% 20%

NPM (%) 13%* 15% 23% 17% 17%

Source: Company Data, Arqaam Capital Research *Blended

September 18 2013



Valuation: sector valuation undemanding in EM context, catalysts

support 14% EPS CAGR and 20% average RoE, vs. 15% EM

Valuation across the UAE and KSA healthcare space is undemanding at 17.6x/15.9x FY 14e P/E,

12.3x/11.1x EV/EBITDA, as the sector continues to trade at a discount to EM comparables (21.5x/18.5x FY

14e/15e P/E, 12.9x/14.1x FY 14e/15e EV/EBITDA). This is despite (i) markedly better margin profiles on

aggregate (EBITDA margin 25% vs. 20%, net margins 20% vs. 15%), on a combination of higher operating

leverage and lower financial leverage, (ii) better RoE profiles (20% vs. 15%, and particularly in the UAE at

a 28% average) and (iii) regulatory catalysts in support of growth.

Exhibit 3: Performance and valuation summary

Rev CAGR EPS CAGR EBITDA margin

Net margin

RoE Div Yield P/E EV/EBITDA

BBG code Name Country FY 13-18e FY 13-18e FY 13e FY 13e FY 13e FY 13e FY 14e FY 15e FY 14e FY 15e

DALLAH AB Dallah Healthcare Holding Co SAUDI ARABIA 16% 20% 22% 15% 10% 1.7% 19.3 15.7 14.0 11.4

MOUWASAT AB Al Mouwasat Medical Services Co SAUDI ARABIA 13% 15% 30% 23% 23% 1.7% 15.2 14.2 12.2 11.9

CARE AB National Medical Care Co SAUDI ARABIA 9% 10% 24% 17% 12% 2.2% 23.4 20.9 15.7 13.9

NMC LN NMC Health PLC UAE 12% 15% 28% 25% 18% 1.5% 12.7 11.5 9.8 8.5

ANH LN Al Noor Hospitals Group Plc UAE 5% 8% 20% 17% 37% 1.7% 17.5 17.2 10.0 9.7

Average- coverage 11% 14% 25% 20% 20% 1.8% 17.6 15.9 12.3 11.1

DALLAH AB Dallah Healthcare Holding Co SAUDI ARABIA 16% 20% 22% 15% 10% 1.7% 19.3 15.7 14.0 11.4

MOUWASAT AB Al Mouwasat Medical Services Co SAUDI ARABIA 13% 15% 30% 23% 23% 1.7% 15.2 14.2 12.2 11.9

CARE AB National Medical Care Co SAUDI ARABIA 9% 10% 24% 17% 12% 2.2% 23.4 20.9 15.7 13.9

Average- KSA 13% 15% 25% 19% 15% 1.9% 19.3 16.9 14.0 12.4

NMC LN NMC Health PLC UAE 12% 15% 28% 25% 18% 1.5% 12.7 11.5 9.8 8.5

ANH LN Al Noor Hospitals Group Plc UAE 5% 8% 20% 17% 37% 1.7% 17.5 17.2 10.0 9.7

Average- UAE 8% 12% 24% 21% 28% 1.6% 15.1 14.4 9.9 9.1

MDC SJ Equity MEDICLINIC INTERNATIONAL LTD South Africa

20% 17% 15% 1.3% 21.4 18.6 14.1 14.1

LHC SJ Equity LIFE HEALTHCARE GROUP HOLDIN South Africa

24% 19% 37% 2.9% 19.3 16.7 11.3 12.6

ODPV3 BZ Equity ODONTOPREV S.A. Brazil

21% 15% 18% 3.5% 22.1 19.9 15.2 17.6

APHS IN Equity APOLLO HOSPITALS ENTERPRISE India

14% 10% 11% 0.7% 33.5 27.3 17.3 17.3

DASA3 BZ Equity DIAGNOSTICOS DA AMERICA SA Brazil

17% 12% 5% 0.6% 16.2 14.0 8.1 9.5

RFMD SP Equity RAFFLES MEDICAL GROUP LTD Singapore

23% 18% 15% 1.4% 22.8 20.0 16.2 18.3

FLRY3 BZ Equity FLEURY SA Brazil

20% 13% 6% 2.8% 15.5 12.9 8.0 9.4

Average- EM 20% 15% 15% 1.9% 21.5 18.5 12.9 14.1

Source: Bloomberg, Company Data, Arqaam Capital Research

September 18 2013



KSA and UAE Healthcare

No better time to be overweight

Hereditary and lifestyle-related diseases are highly prevalent in MENA, and particularly in KSA

and UAE: The obesity rate among Saudi adults, according to the WHO, is 3x the global rate, on par

with the US (36%) and ahead of MENA (<30%). The UAE faces a similar situation, with 36% of the

population classified as obese. The incidence of diabetes is particularly high in both countries, at

c.1.5x the US rate and 1.7x the broader MENA rate. 12% (3.4mn) of the KSA population and 16% of

the UAE population are diabetic (0.9mn), vs. 10% and 9% in the US and broader MENA, according to

the WHO. Perhaps most striking is the incidence of diabetes among young (<39) residents in KSA,

which stands at >2x the US rate at 32% of the overall diabetic population (14% US).

Chronic underinvestment, reactive over-expenditure: The KSA bed/1,000 ratio of 2.2 (1.7 beds

provided by the government, 0.5 by the private sector) is below the global average of 3.0, and far

below the average of 5.5 in developed countries. The UAE is structurally similar, at 1.9 beds/1,000 in

2011. National spending on healthcare in KSA and UAE has been between 4.0% and 2.5% of GDP

over the past 5 years, roughly in-line with the MENA average, but low by developed market

standards (18% in the US, 11% in France and Germany, 8% in the UK). Governmental hospitals still

account for the bulk (65%) of bed capacity in KSA, and 50% in UAE. Conversely, the expenditure on

medical treatments abroad for KSA and UAE nationals has cost both countries an average of USD

5bn in the past 10 years, as a consequence of insufficient domestic healthcare infrastructure and a

shortage of qualified specialised doctors.

The policy response in both countries has stimulated private sector investment in healthcare

capacity, primarily via the phased introduction of mandatory health cover. In KSA, the

government introduced a series of (i) reforms, that have mandated insurance cover for public sector

employees (both Saudi and expatriate), working in the private sector since 2011. The next leg will

address public sector employees along with their dependants, which accounts for 10% of the KSA

workforce, and 22% of the population. (ii) Public spending packages, which focus on upgrading

healthcare infrastructure and domestic medical capability, and (iii) special lending terms targeting

new medical facilities. In the UAE, the introduction of mandatory health cover in Abu Dhabi in 2007

catalysed a 4x growth in inpatient claims, and 8x in outpatients. Dubai and the Northern Emirates

are due to follow suit, releasing 50% in additional insured patients which to date have either met

treatment costs out-of-pocket or via private cover.

This in our view is an industry game-changer that will add further pressure on existing bed

capacity in the UAE, and stimulate demand for qualified medical personnel. Mandatory insurance

cover should in our view lower real treatment costs to patients, raise the volume of health

premiums written substantially for insurers, and compromise margins for healthcare providers who

typically collect a smaller proportion of dues from insurers than from out-of-pocket patients (due to

negotiated agreements with insurers). The volume upside however, is more than sufficient to drive

earnings growth and largely override the compression in margins.

We initiate coverage of 5 key healthcare plays in KSA and UAE. We are positive on NMC UH (Buy,

GBp 440), MOUWASAT AB (Buy, SAR 103) and DALLAH AB (Buy, SAR 88). We find fundamentals

priced in at current price for CARE AB (Hold, SAR 48) and ANH LN (Hold, GBp 840). KSA and UAE

healthcare plays offer value in an EM context, as the sector trades at a 20% discount to EM peer

fwd P/E, while generating stronger equity returns (1.5x) and a 500bps EBITDA margin differential,

on average. Risks: Geopolitics, sufficiency of government spending packages, adoption of key

regulation.

September 18 2013



The healthcare opportunity in KSA

Key drivers: demographics, disease incidence, reform and capacity additions

The KSA Government aims to raise the national bed/patient ratio to 3.3/1,000

residents from 2.2 in FY 08A, by adding 44k beds by FY 17e, via a mix of public

and private facilities

Expatriates are fully covered by mandatory employer-based health insurance.

Mandatory health cover for public sector employees is expected to be rolled out

starting 2014, and represents the next leg up for demand (we estimate +50%)

1-Demographic and epidemiological trends

(i) Population growth: The KSA population base has grown at an average of

3.3%/annum (CAGR FY 08-12e), expanding by c.3.2mn residents in total. Going

forward, the IMF forecasts an overall growth rate of 9% in FY 13-17e, well-ahead

of BRICS (4%), but behind neighboring GCC countries- Qatar (17%), Oman (13%),

and UAE (13%). The UAE and Qatar have generally been larger importers of

regional human capital than KSA in the past 10 years.

Exhibit 4: KSA GDP/capita growth in line with population

growth

Source: IMF

Exhibit 5: 30% of KSA population is <15 years of age, while 5%

is > 60

Source: UNDP

(ii) The proportion of residents > 60 is rising: While Saudi Arabia holds a relatively

young population base (39% below 18, 5% above 60), the portion of elderly

residents is growing, in absolute numbers. As the overall Saudi population base

grew at an average rate of 2.2% between 1990 and 2012, the 60+ age group

expanded by 0.8mn people (+10%) between 1990 and 2012.

Algeria

Bahrain

Jordan

Tunisia

Iraq

Egypt Kuwait LebanonLibya Morocco

Oman

Qatar

KSA

Sudan

Iran

UAE

(4%)

(2%)

--%

2%

4%

6%

8%

10%

12%

14%

(6%) (4%) (2%) --% 2% 4% 6% 8%

5-year population growth

5-year GDP/capita growth

27% 20%31%

43%

23%36%

27% 24%31% 27% 27%

14%30%

40%23%

14%

59% 72% 52%

48%

62%52% 65%

55%55% 55%

64%81%

65% 49%

56%85%

14% 8%17%

10% 16% 12% 8%21%

14% 17%9% 5% 5% 11%

21%

1%

0%

20%

40%

60%

80%

100%

Alg

eri

a

Bah

rain

Egyp

t

Iraq

Iran

Jord

an

Ku

wai

t

Leb

ano

n

Lib

ya

Mo

rocc

o

Om

an

Qat

ar

KSA

Sud

an

Tun

isia

UA

E

Population breakdown by age (FY 12)

< 15 years 15-60 years > 60 years

September 18 2013



(iii) Lifestyle-related disease incidence: sedentary lifestyles, given regional weather

conditions that prohibit extensive outdoor activity, and poor dietary habits linked

to diabetes, cardiovascular diseases, and cancer have rendered KSA exposed to

elevated incidence rates of lifestyle-related diseases. As per data from the World

Health Organisation (WHO), the obesity rate among Saudi adults is 35% (vs. 11%

global, 36% US, <30% MENA), while around 37% of adults have elevated

cholesterol levels (vs. 39% global, 48% US, 40% MENA), and 12% or 3.4mn people

are diabetic (vs. 10% US, 9% MENA). The incidence rate of diabetes among young

(<39 year old) residents however, is particularly high, at 32% (vs. 14% US) of the

overall diabetic population.

Exhibit 6: The 60+ demographic is expected to reach 8% of the

KSA population base by FY 20e

Source: BMI

Exhibit 7: 12% of the KSA population is diabetic, well ahead of

MENA (9%) and the US (10%)

Source: WHO

Exhibit 8: 32% of diabetic patients are <39 years of age

Source: WHO

Exhibit 9: The KSA obesity rate of 35% is among the highest

globally (MENA 30%, global 11%)

Source: WHO

51% 51% 48% 43% 41% 39% 37% 37%

34% 33% 34%36% 39% 38% 38% 34%

11% 12% 13% 17% 16% 18% 19% 21%

0%

20%

40%

60%

80%

100%

120%

FY 90A FY 95A FY 00A FY 05A FY 10A FY 12A FY 15e FY 20e

KSA population breakdown by age

0-19 20-39 40-59 60-75+

16%

12% 12%

10% 9%

5%

9%10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

UAE KSA Lebanon Kuwait Egypt Jordan MENA US

Diabetic incidence as a % of total population

23% 19%35%

11%

32%40%

14%

49%50%

52%

47%

51%

55%

44%

28% 31%

13%

42%

16%5%

42%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Egypt Jordan Kuwait Lebanon KSA UAE USA

Diabetes patients age structure

20-39 40-59 60-79

45%

36% 36% 35% 35% 34%

28%30%

11%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Kuwait UAE US KSA Egypt Jordan Lebanon MENA Global

Obesity rates

September 18 2013



2-Regulation and government spending as a supply–side catalyst

(i) Reform

Major structural changes have positively impacted the healthcare sector in Saudi Arabia over

the past decade. Healthcare reform has been focused on solutions that address rapidly

growing demand, while concurrently effecting improvements to the quality of healthcare

services provided by the public and private sectors. Key reform steps in the past 10 years have

been:

The enforcement of mandatory health insurance for expatriates and nationals

working in the private sector. Introduced a decade ago, this package of reforms

catalysed corporate/private sector demand for healthcare services.

Public spending packages on core healthcare needs: In 2012, the Saudi Government

allocated SAR 61bn (USD 16bn) towards health services and social development, up

from SAR 52bn a year earlier. This accounted for c. 70% of total healthcare

expenditure and constituted 9% of overall government spending. This has helped in:

(i) establishing medical universities and research facilities, (ii) increasing the breadth

and coverage of childhood vaccination programs, and (iii) improving the quality and

availability of care for pregnant mothers and newborns. Life expectancy in the country

has consequently risen to 74 years (vs. 64 in 1990) and infant mortality has dropped

significantly (17 per 1,000 from 26 previously), as of 2010.

Nevertheless, supply shortages remain massive. The KSA bed/patient ratio of 2.2 (1.7 beds

provided by the government, 0.5 by the private sector) is below the global the average of 3.0,

and far below the average of 5.5 in developed countries. As such, we believe that the

structural deficit in healthcare infrastructure prevalent in KSA will continue to (i) require

substantial budget allocations over the next 10 years, (ii) experience continued reform, and (iii)

experience a substantial upgrade in the quality and availability of healthcare services.

Exhibit 10: 2.2 beds per 1,000 patients is low vs. developed

markets

Source: World Bank

Exhibit 11: KSA healthcare per capita expenditure is well-below

global levels (-c.30%)

Source: BMI, OECD Health data

8.3

6.6

3.0 3.0

2.2 2.1 1.9

0

1

2

3

4

5

6

7

8

9

Germany France US UK KSA MENA UAE

Hospital beds per 1,000

3,537

2,373

1,640

1,030 758 709

209 99

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

US Europe UAE Global KSA Western Pacific Eastern Mediterranean

Africa

Healthcare expenditure per capita FY 11A (USD)

September 18 2013



(ii) Mandatory health insurance cover for public sector employees

Phased introduction of mandatory health cover: Towards the end of the 1990s, the Saudi

government rolled out a health insurance system over 3 key phases. More than a decade

following the introduction of mandatory healthcare insurance, the first leg of a 3-phased

health insurance system was completed by 2011.

Phase 1: Covering expatriate workers and their dependents, in addition to Saudi

nationals working in the private sector

Phase 2: Covering public sector employees

Phase 3: Covering other groups, including pilgrims visiting the holy cities.

The implementation of Phase 1 in 2007-12 was instrumental in unlocking demand for

healthcare services in KSA. As insurance policy holders rose 4x to approximately 8.4mn (7mn

expats and 1.4mn Saudi nationals) in 2007-12, aggregate health insurance premiums spiked

from SAR c. 3.1bn in FY 07A to SAR 11.2bn in FY12A. The largest gainers in terms of market

share were Tawuniya 32% (Buy, SAR 37), and Medgulf 22% (Hold, SAR 26), and Bupa 20%

(Hold, SAR 34) which combined have emerged as leaders in the Saudi health insurance market.

Please refer to our coverage of GCC Insurers – Selection is Key, published July 4, 2013.

Phase 2 of the KSA health insurance regulatory system, which mandates cover for public

sector employees with their dependants by insurance providers, is in our view the next leg of

the KSA opportunity healthcare providers, as well as insurers. Public sector employees with

their dependants (10% of workforce, 22% population) have recourse to healthcare services via

the system of public hospitals in the Kingdom. But the opportunity, in our view, is also within

the network of private sector healthcare providers. Given new cover by private insurance

providers, demand for private healthcare in KSA should grow exponentially, albeit from a very

low base. As per SAMA data, the number of Saudi nationals employed in the public sector

stood at 1mn (with 5mn dependants) in FY 11A. Assuming an average health premium of SAR

1,000, the implementation of phase 2 would release c.SAR 6.0bn in new premiums written

(+55% growth vs. FY 12A). We expect this to translate into a 50% rise in the number of patients

seeking treatment within the private healthcare sector of Saudi Arabia.

(iii) Soft loans from the Ministry of Finance to fund private sector capacity roll out

Credit ceiling for soft loans raised in 2011: Given that the initial investment necessary to

acquire a land plot to build a hospital in the vicinity of a major city in KSA is sizable, the Saudi

Ministry of Finance raised the credit ceiling imposed on soft loans offered to the private

healthcare sector to SAR 200mn (vs. SAR 50mn previously), in 2011. Soft loans can be used to

finance up to 50% of the setup cost of a new hospital, covering construction, land acquisition,

medical equipment and maintenance. Soft loans are currently interest-free and typically

offered at 25-yr tenors and 5-yr grace periods. As per SAMA data, the KSA Ministry of Finance

has so far issued 143 loans towards healthcare projects, totalling SAR 2.5bn (USD 680mn) in FY

11A, ( 7% CAGR in FY 07-11A).

September 18 2013



Sizing the impact- soft loans alone to produce 3k new beds (+5%): Assuming an average

development cost/bed of SAR 1.5mn, we believe a medium size hospital in a prime urban

location in KSA runs a development bill of c.SAR 300mn. As the lower of either SAR 200mn or

50% of the total cost of a facility can be financed through a soft loan from the MoF, we

estimate that if an equivalent (SAR 2.5bn) book of loans is issued over the next 5 years, this

should produce an additional 15 hospitals (3k beds) by 2017e, raising the bed/patient ratio to

2.3 (+5% vs. today’s 2.2).

Exhibit 12: Healthcare insurance premiums issued in KSA have

risen at a CAGR of c.30% since FY 07A, driven by

regulation stipulating mandatory health cover

Source: SAMA

Exhibit 13: Government funding of private health projects: 143

loans, SAR 2.5bn issued since 2007

Source: SAMA

3- A closer look at government spending on healthcare services

Government spending remains the primary source of industry capacity growth: National

spending on healthcare has varied between 3.0% and 4.0% (of GDP) over the past 5 years,

largely in line with the regional average, but low by developed market standards (18% in the

US, 11% in France and Germany, 8% in the UK). Though public spending on healthcare by the

government has fluctuated, it remains the main source of healthcare financing, accounting for

c. 70% of total expenditure in 2012. Governmental hospitals still constitute more than 65% of

total hospital beds in the Kingdom.

Exhibit 14: KSA government healthcare spend

Source: SAMA, IMF

Exhibit 15: Public healthcare spending vs. private

Source: SAMA

3.1

4.8

7.3

8.7

9.7

11.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY 07A FY 08A FY 09A FY 10A FY 11A FY 12A

Medical Insurance Premiums in KSA (SAR bn)

1,962

2,195 2,358

2,536 2,536

-

20

40

60

80

100

120

140

160

-

500

1,000

1,500

2,000

2,500

3,000

FY 07A FY 08A FY 09A FY 10A FY 11A

(SAR mn)

Soft loans for health projects Number of loans

34.4

40.4

46.6

52.4

61.0

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0


(SAR bn)

Healthcare spending As a percentage of GDP

67% 66% 66% 69% 70%

33% 34% 34% 31% 30%

0%

20%

40%

60%

80%

100%

120%


Public spending Private spending

September 18 2013



As per the KSA government’s 9th Development Plan for 2010-2014, KSA aims to raise the

hospital bed/patient ratio to 3.3 per 1,000 from 2.2 in FY 08A (vs. 3.0 US, 8.3 Germany, 2.1

MENA). With the country’s population expected to reach 30mn by next year, the initial plan

mandated the addition of 44k beds (34k government and 10K private) by 2014, reflecting an

80% growth in the total bed capacity of the country vs. 2008. We currently find the plan

ambitious and unlikely to be met by 2014, as 10k beds (or +20%) have been introduced over

the past 3-4 years, leaving a huge pipeline due over the next 18 months. The private sector’s

share of the industry has remained unchanged at c.22% since 2011, while we estimate its share

of new capacity at around 25%.

Exhibit 16: 52 hospital added since 2006, of which 9 are private

Source: CARE and MoH

Exhibit 17: 19% overall growth in bed count since 2008

Source: CARE and MoH

218 225 231 244 249 261

39 39 39 39 39 39

127 123 123 125 127136

0

50

100

150

200

250

300

350

400

450

500


Hospitals by sector

Ministry of health hospitals Other Gov. Hospitals Private hospitals

31 31 32 33 34 38

10 11 11 11 11 12

13 11 11 12 13

14

-

10

20

30

40

50

60

70


Beds by sector ('000)

Ministry of health hospitals Other Gov. Hospitals Private hospitals

September 18 2013



Key private healthcare groups in KSA

Exhibit 18: KSA outpatient visits by sector

Source: CARE prospectus Arqaam Capital Research

Exhibit 19: KSA inpatient visits by sector

Source: CARE prospectus Arqaam Capital Research

Exhibit 20: Top 10 private hospitals in Riyadh

Hospitals No. of

beds Market

share Specialty

Dr. Sulaiman Al-Habib Medical Group

655

18% Pediatrics, obstetrics & gynecology, IVF, orthopaedics, ophthalmology, dermatology, plastic

surgery

National Medical Care Company

420 12% Pediatrics, obstetrics & gynecology, orthopaedics, ophthalmology, dermatology

Dallah Hospital

400 11% Pediatrics, obstetrics & gynecology, IVF, orthopaedics, ophthalmology, cardiology

Specialized Medical Center Hospital

400 11% Ophthalmology, pediatrics, cardiology, dermatology, dentistry, and internal medicine

Saudi German Hospital Riyadh

300 8% Cardiology, neurology & neurosurgery, opthalmology, orthopaedics and traumatology

Al Hammadi Hospital

275 8% Obstetrics & gynecology, cardiology, orthopaedics, dermatology, pediatrics

Kingdom Hospital Consulting Clinics

125 3% Surgical & medical obesity, anesthesiology, dentistry

Dr Abdul Rahman Al-Mishari Hospital

122

3% Nursery & neonatal intensive care, obstetrics & gynecology, pediatrics

Al-Mouwasat Hospital

120 3% Pediatrics, obstetrics & gynecology, IVF, orthopaedics, ophthalmology, cardiology

Obeid Specialized Hospital

120 3% Pediatrics, ophthalmology, cardiology, dermatology, gastroenterology, dentistry

Others

708 19%

Total

3,645 100%

Source: Company Data, Arqaam Capital Research

Private inpatient visits,

91%

Public inpatient visits, 9%

FY 10A

Private outpatient visits, 86%

Public outpatient visits, 14%

FY 10A

September 18 2013



The healthcare opportunity in the UAE

Drivers: Demographics, sedentary lifestyles, rising health awareness, shortages in

specialised services, the introduction of mandatory health insurance

Healthcare indicators are generally good in the UAE, but there exists evidence of a rapid

increase in lifestyle diseases (diabetes and obesity) over the past 10 years. The UAE

Ministry of Health-MOH is due to expand health programmes and introduce new

measures aiming at reducing mortality rates

The MOH will address the need to expand healthcare infrastructure over the next 5

years. Shortages exist in (i) bed supply and clinics (UAE bed/patient ratio 1.9 vs 2.1

MENA, 3.0 US) and (ii) specialised doctors (physician/patient 1.9/1000). The UAE

Government has encouraged private participation through PPP programs

The Abu Dhabi population is fully covered by mandatory employer-based health

insurance. Dubai is expected to introduce a similar scheme by the end of 2013.

Mandatory health cover is expected to be rolled out across remaining emirates going

forward

Mandatory insurance cover will catalyse demand and prompt substantial new supply-

we estimate 40% growth in bed count by 2018. (including AD)

1-Demographics and epidemiological trends

Population growth: The UAE population will expand by an annual average of 3% over the

coming 5 years, reaching 6.4mn in FY 17e (an aggregate increase of 0.8 mn). Major age groups

(0-14 and 15-64 years) will expand markedly, whereas the 65+ segment will account for only

1.1% of total population by FY 17e. As opposed to KSA, we believe the UAE will face no

material pressure from an aging population, as expatriates (85% of the workforce) typically

leave the country upon retirement.

Rising incidence of lifestyle-related diseases: Lifestyles, environmental conditions and

dietary habits have been the major causes for diabetes, cardiovascular diseases, and cancer in

the UAE. 36% of the UAE population is obese, as per data from the WHO (vs. 11% global, 36%

US, 30% MENA), 27% of adults have elevated cholesterol levels (vs. 39% global, 48% US, 40%

MENA), and 16% or 0.9mn people are diabetic (vs. 10% US, 9% MENA).

Exhibit 21: UAE Population to grow at c. 3% annually

...............................

Source: World Bank, BMI

Exhibit 22: 1% of overall population is >60, but segment growth >10% 5-

yr CAGR

Source: BMI

5.1 5.2 5.4 5.5 5.7 5.9 6.0 6.2 6.4

2.0%

2.5%

3.0%

3.5%

4.0%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

mn

UAE population Population growth (RHS)

0-14, 14%

15-60, 85%

>60, 1%

UAE population breakdown by age group

September 18 2013



2-Public expenditure on healthcare infrastructure

Expenditure on healthcare in the UAE accounted for 2.0% of GDP in FY 12A (vs. 18% US, 11%

Germany, 8% UK) according to OECD Health data, down from 2.4% in FY 11A. Low healthcare

spending in previous years has stimulated demand for treatment overseas, primarily at

neighbouring countries in MENA (Jordan, Lebanon). Consequently, the UAE’s expenditure on

overseas treatment for its nationals has reached AED 15bn over the past 10 years, by our

estimates.

On the other hand, UAE per capita healthcare spending is considered high on a regional level,

at USD 1,640. This is behind Qatar (USD 1,965) and Kuwait (USD 1,671), which hold smaller

population bases, but ahead of KSA (USD 758) and Oman (USD 415).

As with KSA, public spending remains the main source of healthcare spending in the UAE,

accounting for 73% of total expenditure in FY 12A. Going forward, and as per EIU, health

expenditure is expected to double reaching USD 30bn by FY 17e as (i) the UAE Government

continues to encourage private sector participation through public/private partnerships (PPP),

and (ii) mandatory insurance cover encourages greater use of health services. Among UAE

emirates, private healthcare spending is by far the highest in Abu Dhabi, reaching USD 8.0bn in

FY 10A (vs. 2.0bn for Dubai) as the result of the implementation of mandatory health cover.

Exhibit 23: The UAE public healthcare bill is c. 2% of GDP today

…

Source: BMI, IMF

Exhibit 24: Per-capita healthcare spend is however above the

global average

Source: OECD Health data

10.211.7

12.814.3

15.717.2

18.720.4

22.0

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0.0

5.0

10.0

15.0

20.0

25.0

FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

(USD bn)

Government spending on healthcare as a % of GDP

3,537

2,373

1,640

1,030 758 709

209 99

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

US Europe UAE Global KSA Western Pacific Eastern Mediterranean

Africa

Healthcare expenditure per capita FY 11A (USD)

September 18 2013



3-Healthcare policy

Healthcare policy in the UAE will focus on the expansion of infrastructure (new hospitals and

clinics), and the recruitment of specialised doctors, over the next 5 years. Health authorities

in Abu Dhabi estimate the demand for an additional 1,600 beds (vs. 4,700 beds currently) over

the period. This is underscored by the fact that only 2.0 physicians are currently available in

the emirates per 1,000 residents today, and severe shortages exists specifically in the

availability of specialists in emergency care, cardiology, critical and intensive care.

Exhibit 25: Physicians/1,000 residents: UAE remains behind global average, but ahead of KSA

Source: World Bank

Exhibit 26: 1.9 beds/1,000 residents: particularly low vs. developed markets and MENA average

Source: World Bank

4-Regulatory structure

The UAE Ministry of Health (MoH) is the regulator at the federal level, while public health

services are governed by different regulatory bodies at the emirate level. The UAE is

generally transitioning from a mono-regulatory system to a more decentralised structure in

which each emirate houses an autonomous health authority, supported by its own

infrastructure of institutions.

The Health Authority of Abu Dhabi (HAAD) was established in order to administer all

public healthcare institutions in Abu Dhabi, and to improve medical standards and

regulate policies. In addition, the Abu Dhabi Health Services Company (SEHA) was

established to act as the execution arm of HAAD policies and regulations. SEHA owns

and operates 12 hospital facilities and over 40 primary healthcare clinics in Abu Dhabi.

As the main health authority for the Emirate of Dubai, the Dubai Health Authority

(DHA) was created to regulate and deliver health services in Dubai, including free

zones. DHA owns and operates a network of hospitals and healthcare medical centers.

Mandated with the same objectives as HAAD and DHA, the Emirates Health Authority (EHA) is

responsible for the Northern emirates, including Ajman, Sharjah, Ras Al Khaima, Umm al

Quwain, and Fujairah.

4.3

3.73.4

2.8

2.4

1.91.7

0.9

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Russia Germany France UK US UAE Turkey KSA

Physicians per 1,000

8.3

6.6

3.0 3.0

2.2 2.1 1.9

0

1

2

3

4

5

6

7

8

9

Germany France US UK KSA MENA UAE

Hospital beds per 1,000

September 18 2013



5-Mandatory health cover: substantial demand catalyst to play out in 2014-15

Implemented in Abu Dhabi since 2007, mandatory health insurance cover is expected to be

rolled out across the remainder of the UAE by 2014. In the 3 year period between 2007 and

2010, the number of insurance claims processed in Abu Dhabi jumped 8x to 13.1mn in FY 10A

(98% CAGR). We expect private insurers to be the largest providers of new healthcare policies

going forward.

Exhibit 27: The number of inpatient claims expanded 4x as a result of mandatory health cover…

Source: HAAD

Exhibit 28: …similarly, outpatient claims grew 8x

Source: HAAD

The precedent: the Abu Dhabi health insurance system

Exhibit 29: Abu Dhabi insurance schemes by enrolment..

Source: HAAD

Exhibit 30: …and by claim value

Source: HAAD

There are 3 types of health insurance schemes in operation in Abu Dhabi. These address the

different social demographic groups that reside within the emirate:

Thiqa (UAE Nationals): All UAE nationals residing within the emirate are covered by a broad

scheme that administers a wide range of free treatments (including screening and dentistry),

at all private and public healthcare facilities in Abu Dhabi. It is provided by the National Health

Insurance Company (Daman). The number of UAE Nationals enrolled under Thiqa reached

588k in FY 11A. The program accounts for 16% of the enrolment base in Abu Dhabi in terms of

membership, but accounts for 48% of all claims processed.

42

166

-

20

40

60

80

100

120

140

160

180

FY 07A FY 10A

Inpatient Claims in AD ('000)

CAGR 58%

1.6

12.9

0

2

4

6

8

10

12

14

FY 07A FY 10A

Outpatient Claims in AD (mn)

CAGR 98%

Thiqa, 16%

Enhanced, 37%

Basic, 47%

(FY 11A)

Thiqa, 48%

Enhanced, 36%

Basic, 16%

(FY 11A)

September 18 2013



Enhanced package (Expatriate residents): This is the insurance scheme offered to expatriates

that earn monthly salaries above AED 5k. It is an employer-based scheme offered by all

insurance companies, covering a spouse and 2 dependants with annual limits on payouts,

depending on the premium paid by employers. 37% of insured residents in Abu Dhabi fall

under the ‘Enhanced’ category, and account for a commensurate share of claims (36%).

Basic package (Expatriate residents): Expatriates who earn monthly salaries below AED 5k are

eligible for basic insurance cover. The scheme is employer-based and covers an annual benefit

limit of AED 250k, provided by Daman. It covers inpatient and outpatient care, maternity care

(in-patient maternity treatments subject to pre-approval), and emergency care. We note that

the package covers 47% of individuals enrolled in the program, but accounts for 16% of claims

processed in FY 11A.

The opportunity: Dubai and Northern Emirates

According to the Dubai Health Authority- DHA, 40% of the Dubai population (including 25%

of its expatriate residents) is covered by government and private health insurance schemes

today. That equates to 0.8mn residents, of which we estimate c.40% are UAE nationals, and

c.60% expatriates. We believe that at current, AED 1.32bn in insurance claims are collected in

Dubai, accounting for 30% of the UAE total.

Taking precedent from the growth in insurance claims processed in Abu Dhabi, in the 3 years

following the implementation of mandatory health cover in 2007 (4.0x), we calculate that

patient claims in Dubai should follow suit and reach AED 4.8bn (3.6x FY 11A) by FY 16e

(corresponding to the 3-year period during which the scheme is scheduled to be rolled out).

The jump in UAE claims is in our view a function of (i) higher health insurance premiums

(+150%) and (ii) a rise in claims per patient (+45% over the past 4 years in the UAE).

Accordingly, we expect healthcare demand in Dubai to pressure bed capacity, which will need

to grow by at least 50% (1,700 beds) in the coming 5 years to absorb incoming patients on

aggregate.

Exhibit 31: UAE health insurance premiums grew 2.7x over the past 4 years…

Source: National Bureau of statistics

Exhibit 32: …while claims expanded by 4x

Source: National Bureau of statistics

1.1

2.1

3.1

4.1

5.0

5.6

-

1.0

2.0

3.0

4.0

5.0

6.0


UAE written premiums (AED bn)

0.5

1.1

1.6

2.5

3.6

4.4

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


UAE claims paid (AED bn)

September 18 2013



Medical tourism flows can reverse course as bed capacity and service quality improve The UAE aims to transition towards becoming a recipient, rather than a supplier, of medical

tourism flows in MENA. As an initial step, Dubai has introduced a 3-month visa (extendable to

9) designed for foreign visitors seeking medical treatment in the emirate. Though the

necessary infrastructure is gradually being installed, we believe inbound medical tourism will

remain muted in the near term, as shortage in bed capacity and the availability of specialised

doctors remain in place. It is worth noting that according to the Abu Dhabi Health Authority,

outbound patients seeking treatment abroad have retracted by 50% as of 2011, to reach 1,451

Emirati nationals (equivalent 3.4 per 1000).

September 18 2013



Key UAE healthcare indicators

Exhibit 33: Healthcare indicators in Dubai and Abu Dhabi

Dubai Abu Dhabi

Private hospitals 19 17

Public hospitals 5 18

Total hospitals 24 35

Public beds 2,006 1,765

Private beds 1,238 2,984

Total bed capacity 3,244 4,749

Beds/1,000 people 1.9 2.1

Physicians/1,000 people 2.9 2.0

Source: HAAD, DHA, WHO

Exhibit 34: Abu Dhabi inpatients by sector

Source: HAAD

Exhibit 35: Abu Dhabi outpatients by sector

Source: HAAD

Exhibit 36: Abu Dhabi hospitals by sector

Source: HAAD, company data

Exhibit 37: Dubai hospitals by sector

Source: DHA, company data

Exhibit 38: Abu Dhabi hospital beds by sector

Source: HAAD, company data

Exhibit 39: Dubai hospital beds by sector

Source: DHA, company data

Public, 65%

Private, 35%

FY 11A

Public, 40%

Private, 60%

FY 11A

Private hospitals, 49%Public

hospitals, 51%

FY 11A

Private hospitals, 79%

Public hospitals, 21%

FY 11A

Private hospital beds, 2,984 ,

63%

Public hospital beds, 1,765 ,

37%

FY 11A

Private hospital beds, 1,238 ,

38%Public hospital beds, 2,006 ,

62%

FY 11A

I n i t i a t i o n R e p o r t

S e p t e m b e r 1 8 2 0 1 3



Saudi Arabia – Healthcare and Pharmaceuticals Al Mouwasat Medical Services Co.

BUY

Healthcare and Pharmaceuticals / Saudi Arabia Bloomberg code MOUWASAT AB

Market index SASEIDX

Price target (local) 103

Upside (%) 30.9

Market data 12/09/2013

Last closing price 79.00

52 Week range 48.2-85.0

Market cap (SARmn) 3,950

Market cap (USDmn) 1,053

Average daily traded value (SARmn) 12.6

Average daily traded value (USDmn) 3.4

Year-end (local mn) 2012 2013e 2014e 2015e

Revenues 796.5 943.7 1,114.6 1,199.1

EBITDA 224.7 280.6 337.7 345.9

Net income 171.6 217.7 260.5 279.1

EPS 3.43 4.35 5.21 5.58

P/E (current price) 23.0 18.1 15.2 14.2

BVPS 16.3 19.3 22.7 26.2

P/B (current price) 4.9 4.1 3.5 3.0

EV/EBITDA (current price) 18.3 14.7 12.2 11.9

Div. yield (%) 1.9 1.7 2.2 2.6

FCF margin (%) (1.2) 2.7 2.1 9.4

Net debt/EBITDA (x) 0.4 0.4 0.6 0.5

Net debt/Capital (%) 7.6 10.8 13.7 11.7

Interest cover (x) 164.5 95.8 76.3 58.5

RoAA (%) 15.6 17.2 18.1 16.8

RoAE (%) 22.5 24.5 24.8 22.8

RoIC (%) 18.2 21.7 21.4 20.1

Core growth drivers are in an even blend of volume (bed capacity +85%) and pricing elements (re-pricing of insurance contracts +20%) Cheap in peer context: 23%+ RoE at 15.2x FY 14e P/E, 15% discount to peers. Initiate with Buy, SAR 103 FVE

Mouwasat Medical Services is a broad play on the Saudi healthcare

sector. We believe Mouwasat is trading at an unwarranted 15% discount

to regional peer set multiple of 17.6x/15.9x, given its (i) superior returns

(23% FY 13e RoE vs. 15% for local peers, (ii) EPS outlook at 15% CAGR, and

(iii) unique growth catalysts. We value Mouwasat at SAR 103/share,

implying 30% in upside from current market price, using DCF. We initiate

with a Buy rating and a FVE of SAR 103.

The business enjoys 3 key growth catalysts that in our view are currently

foregone in current share price: (i) Bed capacity expansion to 1,089 beds

(c. 85% growth) by FY 18e, translating into an 5-yr revenue CAGR of 13%,

(ii) A departure from its core market towards the urban center of Riyadh,

through the roll out of an additional 175 beds (23% of total bed capacity)

by the end of FY 13e. Both volume elements above should produce a 75%

growth in revenues over the next 5 years. (iii) Agreements with insurers

regarding the collection of patient claims, which constitute 40% of

revenues, have recently been re-priced upwards by an average of 20%.

This is a negotiated process that adjusts the collection ratios applied on

inpatient and outpatient services administered to patients that enjoy

health insurance cover. Contract prices have not been reset since 1994,

and we model for a 2% increase in FY 14e onwards. This should translate

into 8% incremental revenues, and consequently a 160bps expansion in

blended margins. Both volume and price elements combined will in our

view drive 13% revenue CAGR.

Revenue visibility is strong on corporate client base: 40% of revenues

derive from corporate clients (Aramco, GOSI and other large corporates).

The company’s broad presence in the eastern province has resulted in a

disproportionately large share of the healthcare industry in the region, at

28% (inpatients) and 16% (outpatients).

Cheap in peer context: Mouwasat currently trades at 15.2x FY 14e EPS vs.

17.6x and 19.3x for regional and local peers, implying a discount of 15%

and 20%, respectively. We believe the stock should re-rate and trade in-

line with sector multiples, at the very least. Risks: Delays, Saudisation

laws.

SAR 103


Price Performance

81

99

117

135

153

171

Sep-12 Dec-12 Mar-13 Jun-13

MOUWASAT AB SASEIDX

September 18 2013

Al Mouwasat Medical Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 22

Abacus Arqaam Capital Fundamental Data

Profitability

Growth

Gearing

Valuation

0%

20%

40%

2012 2013e 2014e 2015e 2016e

EBITDA Margin Net Margin

0%

10%

20%

30%

2012 2013e 2014e 2015e 2016e

Revenues Assets

0%

5%

10%

15%

0.0

0.2

0.4

0.6

2012 2013e 2014e 2015e 2016e

Net Debt/Capital Net Debt/EBITDA

0

10

20

30

2012 2013e 2014e 2015e 2016e

P/E P/E Sector

Al Mouwasat Medical Services Co.

Year-end 2011 2012 2013e 2014e 2015e 2016e

Financial summary

Reported EPS 2.96 3.43 4.35 5.21 5.58 6.08

Diluted EPS 2.96 3.43 4.35 5.21 5.58 6.08

DPS 1.00 1.50 1.37 1.74 2.08 2.23

BVPS 14.22 16.27 19.25 22.72 26.22 30.07

Weighted average shares 50.00 50.00 50.00 50.00 50.00 50.00

Average market cap 2,239.00 2,617.50 3,865.00 3,865.00 3,865.00 3,865.00

Year-end 2011 2012 2013e 2014e 2015e 2016e

Valuation metrics

P/E (x) (current price) 26.7 23.0 18.1 15.2 14.2 13.0

P/E (x) (target price) 34.9 30.1 23.7 19.8 18.5 17.0

P/BV (x) (target price) 7.3 6.4 5.4 4.5 3.9 3.4

EV/EBITDA (x) (target price) 25.8 23.6 18.9 15.7 15.3 13.5

EV/FCF (x) 41.5 (534.3) 207.3 221.6 46.8 24.3

EV/Invested capital (x) 6.4 5.4 5.0 4.1 3.6 3.2

Dividend yield (%) 1.3 1.9 1.7 2.2 2.6 2.8

Year-end 2011 2012 2013e 2014e 2015e 2016e

Growth (%)

Revenues 15.5 17.4 18.5 18.1 7.6 15.1

EBITDA 16.7 9.4 24.9 20.3 2.4 13.5

EBIT 18.5 9.9 28.7 19.5 7.3 8.8

Net income 24.9 15.9 26.9 19.7 7.2 8.9

Year-end 2011 2012 2013e 2014e 2015e 2016e

Margins (%)

EBITDA 30.3 28.2 29.7 30.3 28.8 28.4

EBIT 24.9 23.4 25.4 25.7 25.6 24.2

Net 21.8 21.5 23.1 23.4 23.3 22.0

Year-end 2011 2012 2013e 2014e 2015e 2016e

Returns (%)

RoAA 15.8 15.6 17.2 18.1 16.8 16.3

RoAE 22.5 22.5 24.5 24.8 22.8 21.6

RoIC 18.6 18.2 21.7 21.4 20.1 19.3

FCF margin 18.8 (1.2) 2.7 2.1 9.4 15.8

Year-end 2011 2012 2013e 2014e 2015e 2016e

Gearing (%)

Net debt/Capital (6.4) 7.6 10.8 13.7 11.7 4.2

Net debt/Equity (7.6) 10.0 12.9 16.5 13.7 4.8

Interest cover (x) 79.2 164.5 95.8 76.3 58.5 60.8

Net debt/EBITDA (x) (0.3) 0.4 0.4 0.6 0.5 0.2

September 18 2013



Company overview

Established in 1974, Mouwasat Hospital owns and operates 4 hospitals and 2 dispensaries in the eastern province of KSA with a total bed capacity of 594 beds and 227 clinics as of FY 12A. The company is also in the process of launching a new hospital in Riyadh at a total bed capacity of 175 beds. SABIC and Saudi Aramco are the company’s two largest clients, generating 40% of its healthcare revenues.

Ownership and management

Shareholders

Mohammed Sultan Hammad Al Subaie 17.5%

Nasser Sultan Fahad Al Subaie 17.5%

Suleiman Mohammed Suleiman Al Saleem 17.5%

Public 47.5%

Source: Zawya

Board of Directors

Mr. Mohammed Sultan Hammad Al Subaie Chairman

Mr. Nasser Sultan Fahad Al Subaie Director

Mr. Mohammed Bin Suleiman Al Saleem Director

Mr. Khaled Bin Suleiman Al Saleem Director

Mr. Ibrahim Hamad Al Babtain Director

Mr. David Anthony Price Director

Mr. Abdulaziz Saad Al Mangoor Director

Source: Company data

Al Mouwasat Medical Services Co.

Year-end 2011 2012 2013e 2014e 2015e 2016e

Income statement (SAR mn)

Sales revenue 678.4 796.5 943.7 1,114.6 1,199.1 1,380.3

Gross profit 324.0 372.7 456.5 542.5 582.9 651.6

SG&A (154.7) (186.7) (217.1) (256.4) (275.8) (317.5)

EBITDA 205.5 224.7 280.6 337.7 345.9 392.5

Depreciation & Amortisation (36.2) (38.7) (41.2) (51.6) (38.8) (58.3)

EBIT 169.3 186.0 239.4 286.1 307.1 334.1

Net interest income(expense) (2.1) (1.1) (2.5) (3.8) (5.3) (5.5)

Associates/affiliates — — — — — —

Exceptionals/extraordinaries — — — — — —

Other pre-tax income/(expense) 8.5 8.7 8.7 8.7 8.7 8.7

Profit before tax 175.6 193.6 245.6 291.0 310.5 337.3

Zakat (16.0) (8.6) (10.8) (12.9) (13.7) (14.9)

Minorities (11.5) (13.4) (17.0) (17.7) (17.7) (18.5)

Other post-tax income/(expense) — — — — — —

Net profit 148.1 171.6 217.7 260.5 279.1 303.9

Arqaam adjustments (including dilution) — — — — — —

Arqaam Net profit 148.1 171.6 217.7 260.5 279.1 303.9

Year-end 2011 2012 2013e 2014e 2015e 2016e

Balance sheet (SAR mn)

Cash and equivalents 192.7 177.7 63.0 44.6 45.5 153.2

Receivables 183.5 215.7 255.6 301.9 324.8 373.9

Inventories 58.6 62.6 72.0 84.5 91.1 107.7

Tangible fixed assets 525.6 688.0 852.9 1,059.3 1,214.4 1,272.8

Other assets including goodwill 24.5 75.1 75.1 75.1 75.1 75.1

Total assets 984.8 1,219.2 1,318.6 1,565.4 1,750.9 1,982.6

Payables 108.3 115.2 132.5 155.6 167.5 198.1

Interest bearing debt 138.5 259.1 187.6 232.3 224.5 225.9

Other liabilities 27.2 31.2 35.9 41.5 47.9 55.3

Total liabilities 274.0 405.6 355.9 429.4 439.9 479.3

Shareholders equity 710.9 813.6 962.7 1,136.1 1,311.0 1,503.3

Minorities — — — — — —

Total liabilities & shareholders equity 984.8 1,219.2 1,318.6 1,565.4 1,750.9 1,982.6

Year-end 2011 2012 2013e 2014e 2015e 2016e

Cash flow (SAR mn)

Cashflow from operations 221.9 192.8 231.6 281.9 306.9 334.5

Net capex (94.2) (202.7) (206.1) (258.0) (193.9) (116.6)

Free cash flow 127.7 (9.9) 25.5 23.9 113.0 217.9

Equity raised/(bought back) — — — — — —

Dividends paid (50.0) (75.0) (68.6) (87.1) (104.2) (111.6)

Net inc/(dec) in borrowings (28.2) 120.6 (71.6) 44.8 (7.9) 1.4

Other investing/financing cash flows 6.1 (50.7) — — — —

Net cash flow 55.5 (15.0) (114.7) (18.4) 0.9 107.6

Change in working capital 21.6 (27.1) (32.0) (35.7) (17.4) (35.1)

Mohammad Kamal Dahlia Sabaayon, CFA [email protected] Arqaam Capital Research Offshore s.a.l +9714 507 1743

September 18 2013


Bed capacity expansion (+85%) and the re-pricing of insurance

contracts (+20%) drive 15% EPS CAGR

Cheap in peer context: 15.2x FY 14e EPS 15% discount to comparables. Initiate with

Buy, SAR 103 FVE

Al Mouwasat is a medical services provider that operates 6 facilities in the Eastern province

of KSA (Dammam, Jubail, Qatif, and Madina). We believe that the company is very well

positioned to capitalise on (i) its geographical presence in the Eastern Province (largest oil

industry community in the Kingdom; population of 4.3mn) and its strategic relationships with

insurance companies and direct corporate clients, which offer medium-term visibility on

revenue growth, (ii) the recent re-pricing of contracts with insurance companies, which should

support revenues from insurance (40% in FY 12A) by 20%+, (iii) expansion plans to raise its bed

capacity to 1,089 beds (c. 90% growth) by FY 18e, translating into a 5-yr revenue CAGR of 13%,

and (iv) future plans to expand to Riyadh by operating 175 beds (23%) by the end of FY 13e.

We initiate coverage on Mouwasat with a Buy recommendation and a fair value estimate of

SAR 103, offering 30% in upside potential vs. current market price.

Exhibit 40: KSA beds by sector


Exhibit 41: Mouwasat market share (based on inpatient admissions)


Riyadh Hospital to expand foothold in the Saudi Capital: The company is currently

establishing 2 new hospitals in Riyadh (which houses 26% of the Saudi population) and Khobar

(4%) in a step intended to expend into a relatively underpenetrated, highly concentrated urban

(2.6x bed per 1,000 residents (vs. 2.1 MENA, 3.0 US, 5 mn residents). Additionally, Mouwasat

intends to raise total bed capacity to 1,089 beds by FY 18e (+85%, vs. 594 beds in FY 12A) by

expanding its existing 4 hospitals in the Eastern Province (Dammam, Jubail, Qatif and Madina).

Riyadh hospital is expected to constitute 15% of the company’s total revenues by FY 18e.

Overall CAPEX in relation to both the new hospitals and bed capacity expansions amounts to

SAR 770mn, and will be financed through (i) SAR 240mn from the company’s operation (net

cash as of H1 13A is 240mn), (ii) a soft loan from the Ministry of Finance (SAR 200mn), (iii) and

the remaining 330mn from conventional loans.

Private hospital beds, 23%

Public hospital beds, 77%

22.9%24.1%

25.8%26.7% 27.5%

14.4% 14.5% 14.9%16.5%

19.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


East region Madinah

September 18 2013


Exhibit 42: 495 new beds over the next five years drive patient admissions

FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Number of clinics 188 188 188 253 253 253 376 376

Number of beds 594 594 594 769 869 869 1,089 1,089

Inpatient admissions (000') 37 39 42 44 59 66 72 78

Outpatient admissions (000') 1,316 1,341 1,454 1,402 1,525 1,550 1,912 2,121


Revenue visibility is high, given corporate client base: As 40% of revenues are driven by

corporate clients (Aramco, GOSI and other large corporations), Mouwasat enjoys a degree of

revenue visibility absent among comparable healthcare providers. The company’s broad

presence in the Eastern Province has resulted in strong relationships with direct corporate

clients. There exists a direct correlation between the proportion of corporate clientele

contributing to revenues (40%), and the degree of exposure to insurance-based patient

visitation (40%), as mandatory health cover in KSA since 2007 has mandated insurance cover

for all residents employed in the private sector.

Exhibit 43: Revenue visibility is high given corporate client base


Exhibit 44: 1,089 bed capacity by FY 17e


Re-pricing continues to drive revenue in FY 13e: The business posted robust revenue growth

in the past 3 years (FY 10-12A CAGR 17%), mainly due to (i) higher healthcare charges imposed

on cash business (20% in FY 12A) , and (ii) rising patient visitation (+11%), as a result of a ramp

up in utilisation rates (53% in FY 12A) across facilities. In FY 11, the business received approval

from the Ministry of Health to raise its charges on medical services by 25%, and in April of this

year announced a 20-25% increase on insurance premiums, effective January 2013. The

increase in premiums will be passed on to all insured clients, with the exception for Medgulf,

which had its charges revised in 2011 (as Mouwasat’s SABIC account became insurance-based,

and covered by Medgulf). The account was previously a direct corporate client of Mouwasat’s).

We expect average claims/patient to grow by 8% in FY 13e, and to subsequently settle at an

average growth of 2% thereafter. We expect Mouwasat to register revenue CAGR of c.12%

over the next 3 years via (i) a ramp up in utilisation rates within existing hospitals, (and ii) the

launch of 2 new hospitals by 2016 (driving c.10% of revenue growth by 2016).

Insurance companies, 40%

Corporates (inlcuding

Aramco) , 40%

Cash business, 20%

Revenue breakdown by client FY 12A

188 188 188 253 253 253

376 376

594 594 594

769

869 869

1,089 1,089

--

200

400

600

800

1,000

1,200


Number of clinics Number of beds

September 18 2013


Valuation: trades at 15% discount to lower-margin peer set, RoE

superiority should command premium

30% in potential upside on DCF-based price target of SAR 103; initiate with Buy

Cheap in peer context: Mouwasat currently trades at 15.2x FY 14e EPS vs. 17.6x and 19.3x for

regional and local peers, implying a discount of 15% and 20%, respectively. We believe

Mouwasat should re-rate to trade to trade in-line with domestic peers at the very least, given

its (i) stronger growth (5-yr EPS CAGR of 15%, vs. 14% peers), (ii) leading position in the Saudi

healthcare market (28% and 16% in the eastern region in terms of inpatients and outpatients

respectively, in FY 12A), (iii) superior profitability (23% FY 14e RoE vs. 15% for local peers).

Exhibit 45: Unwarranted 15% discount to regional peers

P/E EV/EBITDA

At market price FY 13e FY 14e FY 15e FY 13e FY 14e FY 15e

Dallah Healthcare 26.0 19.3 15.7 16.8 14.0 11.4

Mouwasat 18.1 15.2 14.2 14.7 12.2 11.9

National Medical Care 24.8 23.4 20.9 17.1 15.4 13.6

NMC Health 13.8 12.7 11.5 10.7 9.8 8.5

Al Noor Hospitals Group 23.1 17.5 17.2 12.5 10.0 9.7

Average regional peers 21.2 17.6 15.9 14.3 12.3 11.1

Premium/ (discount) -14% -14% -11% 2% -1% 7%


Exhibit 46: Attractively priced despite RoE differential…


Exhibit 47: …And EPS growth (5-yr forward CAGR)


DALLAH

MOUWASAT

CARE

NMC

Al Noor

10

12

14

16

18

20

22

24

26

0% 10% 20% 30% 40%

FY 14e RoE (%)

PE 14e

DALLAH

MOUWASAT

CARE

NMC

Al Noor

10

12

14

16

18

20

22

24

26

0% 5% 10% 15% 20%

5-yr EPS CAGR

P/E 14e

September 18 2013


We value Mouwasat at SAR 103/share, implying 30% in upside potential from current market

price, using DCF. We apply a WACC of 9.5% (11.0% Re, 0.85 Beta, 5% Rd) and a terminal growth

rate of 4%. We believe current market valuation (At 15.2x/14.2x FY 14e/15e P/E) does not

reflect business fundamentals, catalysts in the coming 12 months, growth (13% FY 13-18e

revenue CAGR) and comparatively superior returns (+23% RoE).

Exhibit 48: DCF summary

Source: Company Data, Arqaam Capital Research *FCF calculation based on adjusted EBIT rather than net income

Risks

Delays in the launch of facilities in Riyadh and Madina could be material to growth forecasts.

Saudisation requirements may become more demanding, and this is material to margins. We

estimate that for every 5% increase in staff costs, a 130bps compression in EBITDA margins is

likely. This on aggregate cam cut our FVE by 7%.

DCF summary

SARmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e FY 18e FY 19e FY 20e

EBIT (1-τ) 229 273 294 319 385 454 470 479

Depreciation & Amortization 41 52 39 58 54 61 63 64

EBITDA 270 325 332 378 439 514 532 543

Working Capital Changes (32) (36) (11) (28) (29) (31) (1) 6

Operating Cash Flow 238 289 321 350 410 484 532 549

Purchase of PPE (206) (258) (194) (117) (108) (121) (125) (128)

Free Cash Flow to Firm 32 31 127 233 301 362 406 421

Discount Factor using WACC at 9.5% 0.97 0.89 0.81 0.74 0.68 0.62 0.56 0.51

PV of Visible FCFF 10 28 103 173 204 224 229 217

Terminal Value 7,958

Equity Valuation WACC parameters

PV of Visible FCFF 1,186 22% Rf 4.2%

PV of Terminal Value 4,094 78% EMRP 8.0%

Enterprise Value 5,280 Adjusted Beta 0.85

Cost of Equity 11.0%

Cash & Cash Equivalents 178

Less: Net (Debt) Funds (259) Marginal tax rate 2.50%

Investments in associates 8

NCI (50) Cost of Debt 5.00%

D/C (market) 25.00%

Equity Value 5,156 WACC 9.50%

NOSH 50 Perpetual grow th 4.00%

Equity Value per Share 103

Implied multiples

EV/EBITDA 19.6 16.2 15.9 14.0 12.0 10.3 9.9 9.7

P/E 23.7 19.8 18.5 17.0 14.0 11.8 11.4 11.2

P/B 5.4 4.5 3.9 3.4 2.9 2.5 2.2 2.0

September 18 2013


Business Trends

Exhibit 49: Uniform growth across business lines (13% CAGR)


Exhibit 50: Patient visitation to double by FY 17e


Exhibit 51: Margin expansion in FY 13e on a re-pricing of insurance contracts


Exhibit 52: Improvements to filter through to net margins


Exhibit 53: RoE among the highest in healthcare coverage space


Exhibit 54: Positive free cash flows throughout forecast period …….


192 229 275 312 422 480 538 594 257 301

358 450

492 500

604 697

137 148

164 182

201 219

238

257

--

200

400

600

800

1,000

1,200

1,400

1,600

1,800


Revenue breakdown by segment (SAR mn)

Inpatient revenues Outpatient revenues Pharma revenues

--

500

1,000

1,500

2,000

2,500

3,000

--

10

20

30

40

50

60

70

80

90


Total number of patients (000')

Number of inpatient visitors Number of outpatient visitors

176 205

225

281

338 346

392

457

--

50

100

150

200

250

300

350

400

450

500

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


(SAR mn)

EBITDA EBITDA margin

119 148

172

218

260 279

304

368

--

50

100

150

200

250

300

350

400

--%

5.0%

10.0%

15.0%

20.0%

25.0%


(SAR mn)

Net income Net margin

--

50

100

150

200

250

300


Capex vs. borrowings (SAR mn)

Capex Debt

167 190 216 270

325 332 378 439

(84)(94)

(203)

(206) (258) (194)(117) (108)

(400)

(300)

(200)

(100)

--

100

200

300

400

500


FCF composition (SAR mn)

NOPLAT Working capital changes Capex

September 18 2013


Appendix 1: Financials and forecasts Revenues

Revenues have reflected solid growth as of FY 09A, on the back of (i) a strengthening in

hospital charges (+20%, starting 2011), (ii) improving bed utilisation rates on account of growth

in inpatient and outpatient visitation (+11%), (iii) and a slight improvement in pharmaceuticals

revenues, driven by higher volume.

(i) Hospital revenues grew at a CAGR of 19% over the past three years, driven by (i)

the re-pricing of patient visitation charges applied on cash and direct corporate

clients along with (ii) a rise in overall patient visitation (+11%). We forecast 5-yr

inpatient revenue CAGR of 14%, reaching SAR 590mn by FY 17e. This would in our

view be the result of the addition of 100 beds (+88%) in incremental capacity at

Jubail hospital (214 beds by FY 14e), 175 beds at Riyadh hospital (Q1 14e), and

220 beds (FY 16e) via the new hospital in Khobar. For Mouwasat’s outpatient

segment, we forecast a 5-yr outpatient revenue CAGR of 10%, driven by the rise

in outpatient visits that we expect to materialize via the launch of 65 clinics at

both Riyadh hospital (FY 14e) and Khobar hospital (FY 16e), and a further 68

clinics by FY 15e at existing hospitals and dispensaries.

(ii) Pharmaceuticals revenues have exhibited 35% CAGR (FY10-12A), largely driven

by volumes and minor support from pricing elements. We see a robust 3-year

CAGR (FY 13-16e) of 24% in pharmaceuticals-related revenues (SAR 103mn in FY

16e), and see the segment constituting 9% of overall revenues by FY 16e, vs. 7.5%

in Q1 13A.

Margins We expect an improvement in margins starting FY 13e, supported by a rise in the pricing of

patient claims that would precipitate from the re-negotiation of insurance claim collections,

starting Q2 13A. This rise will however be partially offset by the start-up cost behind Riyadh

Hospital, which we expect to be inaugurated in Q1 14e as well. We further forecast a degree of

margin compression in FY 16e, with the launch of the Khobar Hospital, which will operate 220

beds and 65 clinics. Overall, we see a drop in blended gross margins to 47% in FY 16e followed

by a 200bps expansion by FY 18e.

Balance sheet The bulk of expansion CAPEX will be debt-financed, and that is no material strain on the

balance sheet: At the end of H1 13A, Mouwasat held a cash position of SAR 240mn, vs. total

debt of SAR 290mn. We expect the company to deploy c. SAR 450mn over the next four years

towards: (i) the Jubail Hospital expansion (SAR 110mn), (ii) Khobar Hospital (SAR 320mn), and

(iii) Riyadh Hospital (SAR 20mn). We model for maintenance CAPEX of 7% of total revenues

thereafter. We estimate overall leverage of c. SAR 110mn by FY 17e, consisting mostly of a soft

loan from the Ministry of Finance. Interest cover (73x) and net debt/EBITDA (45%) in the

medium term remain comfortable.


S e p t e m b e r 1 8 2 0 1 3



Saudi Arabia – Healthcare and Pharmaceuticals Dallah Healthcare Holding Co.

BUY

Healthcare and Pharmaceuticals / Saudi Arabia Bloomberg code DALLAH AB



Upside (%) 40.0



52 Week range 51.0-96.8


Market cap (USDmn) 777




Revenues 637.1 732.4 773.7 880.9

EBITDA 159.9 157.9 189.0 233.2

Net income 133.4 112.1 151.1 185.8

EPS 2.83 2.38 3.20 3.94

P/E (current price) 21.9 26.0 19.3 15.7

BVPS 23.6 24.9 26.9 29.4



Div. yield (%) 0.2 1.7 2.1 2.2

FCF margin (%) 8.8 (17.3) (3.1) 2.6

Net debt/EBITDA (x) (3.5) (1.7) (1.0) (0.6)

Net debt/Capital (%) (49.6) (21.8) (13.7) (9.1)

Interest cover (x) 48.6 63.1 36.4 23.2

RoAA (%) 13.5 8.4 10.5 11.6

RoAE (%) 16.8 9.8 12.4 14.0

RoIC (%) 11.6 8.8 11.3 13.1

2x expansion in bed capacity drives 20% 5-yr EPS CAGR, as substantial cash position (27% assets) is deployed

Strong pricing power vs. cash-paying patients

Initiate with Buy and SAR 88 FVE

Dallah offers an access point into the premium segment of the KSA healthcare sector, which enjoys particularly strong margins, and operating leverage. The business is linked with a strong domestic brand name, and holds 16% of the market for private hospital beds in Riyadh, which is substantial. Dallah’s planned 2x expansion in bed capacity should translate into FY 13-18e EPS CAGR of 20%, which is further supported by double-digit growth in its pharmaceuticals business (17% 5-yr revenue CAGR), when accounting for newly-introduced manufacturing capability (in addition to Dallah’s existing distribution business). IPO proceeds of SAR 540mn raised in December 2012 should be deployed towards growth within the next 2 years. We initiate with Buy and an FVE of SAR 88, offering 40% in upside potential from current price.

We see highly-defendable revenue CAGR of 16% CAGR in FY 13-18e: the business’s healthcare segment is the largest contributor to overall revenues (90% today, 88% in FY 15e), and we project growth at a 5-yr CAGR of 16% (driven by 100% expansion in bed capacity). We also expect double-digit growth in Dallah’s pharmaceuticals business (17% 5-yr revenue CAGR). Newly-introduced manufacturing business lines should supplement ancillary income to the overall business.

30% of revenues generated by cash-paying patients- this produces superior claims/patient when compared to insurance-heavy local comparables: Dallah’s average claim/patient is 65% higher than the average at Mouwasat and CARE, at SAR 10,430 (inpatients) and SAR 525 (outpatients) in FY 12A. This is due to Dallah’s price-setting power vs. cash-paying patients (30% at Dallah vs. 16% elsewhere).

Current market price reflects discount to Emerging peer set: current

market valuation implies a 15% discount to EM peers on FY 15e EPS. We

argue for superior multiples in favour of Dallah, given its substantial

margin advantage (net margin 21% vs. 10% EM) and higher EPS growth

(18% vs.14% EM). We believe the market is overlooking the role of bed

capacity growth on EPS at current multiples. We initiate with a Buy

recommendation and SAR 88 FVE.

Risks: Target clientele impacted by health insurance coverage in KSA. Saudisation: a 10% increase in staff wages produces 6% cut to EV.

SAR 88


Price Performance

89

119

149

179

209

239

Dec-12 Mar-13 Jun-13

DALLAH AB SASEIDX

September 18 2013

Dallah Healthcare Holding Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 31


Profitability

Growth

Gearing

Valuation

0%

10%

20%

30%

2012 2013e 2014e 2015e 2016e


0%

50%

100%

2012 2013e 2014e 2015e 2016e

Revenues Assets

-60%

-40%

-20%

0%

-4.0

-2.0

0.0

2012 2013e 2014e 2015e 2016e


0

10

20

30

2012 2013e 2014e 2015e 2016e

P/E P/E Sector

Dallah Healthcare Holding Co.

Year-end 2011 2012 2013e 2014e 2015e 2016e

Financial summary

Reported EPS 2.40 2.83 2.38 3.20 3.94 5.05

Diluted EPS — 2.83 2.38 3.20 3.94 5.05

DPS 2.23 0.14 1.07 1.28 1.38 2.53

BVPS 9.93 23.64 24.94 26.86 29.42 31.95

Weighted average shares — 23.60 47.20 47.20 47.20 47.20

Average market cap — 3,024.10 2,935.84 2,935.84 2,935.84 2,935.84

Year-end 2011 2012 2013e 2014e 2015e 2016e

Valuation metrics


P/E (x) (target price) 36.7 31.2 37.1 27.5 22.4 17.4



EV/FCF (x) 57.1 67.0 (29.7) (156.6) 163.0 21.0


Dividend yield (%) 3.6 0.2 1.7 2.1 2.2 4.1

Year-end 2011 2012 2013e 2014e 2015e 2016e

Growth (%)

Revenues 11.6 20.8 15.0 5.6 13.9 18.1

EBITDA 14.9 29.5 (1.2) 19.7 23.3 24.5

EBIT 10.2 33.8 (7.4) 21.4 26.5 29.9

Net income 20.0 17.6 (15.9) 34.7 23.0 28.3

Year-end 2011 2012 2013e 2014e 2015e 2016e

Margins (%)

EBITDA 23.4 25.1 21.6 24.4 26.5 27.9

EBIT 18.6 20.6 16.6 19.0 21.1 23.2

Net 21.5 20.9 15.3 19.5 21.1 22.9

Year-end 2011 2012 2013e 2014e 2015e 2016e

Returns (%)

RoAA 19.1 13.5 8.4 10.5 11.6 13.5

RoAE 27.5 16.8 9.8 12.4 14.0 16.5

RoIC 20.1 11.6 8.8 11.3 13.1 15.6

FCF margin 12.5 8.8 (17.3) (3.1) 2.6 17.3

Year-end 2011 2012 2013e 2014e 2015e 2016e

Gearing (%)

Net debt/Capital (1.5) (49.6) (21.8) (13.7) (9.1) (12.4)

Net debt/Equity (1.7) (49.8) (22.6) (14.3) (10.0) (13.3)

Interest cover (x) 44.7 48.6 63.1 36.4 23.2 24.9

Net debt/EBITDA (x) (0.1) (3.5) (1.7) (1.0) (0.6) (0.7)

September 18 2013



Company overview

Established in 1987, Dallah Healthcare Holding publicly listed in December 2012 after raising SAR 540mn in IPO funds. The business owns and operates one hospital in Riyadh (Dallah Hospital) which operated at a capacity of 352 beds and 117 clinics in 2012. This is in addition to Dallah’s distribution and manufacturing capability vis-a-vis herbal medicines and cosmetic products. Dallah further operates and manages other hospitals in the Kingdom (3% of revenue in FY 12A).


Shareholders

Dallah Al Baraka Holding 51.7%

Tarek Othman El Kasabi 5.2%

Mohamad Rashed Al Fakih 5.2%

Kamel Family 4.2%

Asir company for trading 3.5%

Public 30.1%

Source: Zawya

Board of Directors

Mr. Tariq Othman Alqasabi Chairman

Dr. Mohammed Rashid Alfagih Director

Ammar Hasan Kamel Director

Fahad Abdullah Algassem Director

Fahad Siraj Malaikah Director

Dr. Ahmad Saleh Babaeer Director

Dr. Abdulrahman Abdulaziz Alsuwailem Director

Fares Ibrahim Alhumaid Director

Mohiuddin Saleh Kamel Director


Dallah Healthcare Holding Co.

Year-end 2011 2012 2013e 2014e 2015e 2016e


Sales revenue 527.3 637.1 732.4 773.7 880.9 1,040.2

Gross profit 188.0 243.6 304.4 329.0 362.4 426.9

SG&A (90.1) (112.6) (183.1) (181.8) (176.2) (185.2)

EBITDA 123.4 159.9 157.9 189.0 233.2 290.3


EBIT 97.9 131.0 121.3 147.2 186.2 241.8






Zakat (3.8) (1.7) (18.2) (3.7) (4.7) (6.0)



Net profit 113.4 133.4 112.1 151.1 185.8 238.5



Year-end 2011 2012 2013e 2014e 2015e 2016e



Receivables 124.3 159.8 184.6 197.1 226.9 270.7

Inventories 30.5 33.8 37.5 40.2 48.3 58.8

Tangible fixed assets 380.3 437.6 657.7 824.9 965.9 990.1


Total assets 698.3 1,272.7 1,381.9 1,494.9 1,716.7 1,812.9

Payables 50.4 54.9 61.0 64.6 76.7 92.4




Shareholders equity 468.8 1,115.6 1,177.3 1,267.9 1,388.7 1,507.9


Total liabilities & shareholders equity 698.3 1,272.7 1,381.9 1,494.9 1,716.7 1,812.9

Year-end 2011 2012 2013e 2014e 2015e 2016e

Cash flow (SAR mn)


Net capex (72.2) (86.4) (256.7) (209.1) (187.9) (72.8)

Free cash flow 66.0 56.3 (127.0) (24.1) 23.1 179.7


Dividends paid (105.1) (6.5) (50.5) (60.4) (65.0) (119.2)

Net inc/(dec) in borrowings 77.1 (72.0) 38.0 15.0 85.0 (43.0)

Other investing/financing cash flows (9.6) (4.0) (112.0) — — —

Net cash flow 28.4 (26.2) (251.5) (69.5) 43.1 17.5

Change in working capital (29.3) (62.9) (22.5) (11.6) (25.7) (38.7)


September 18 2013


2x expansion in bed capacity drives 20% 5-yr forecast EPS CAGR,

as substantial cash position (27% assets) is deployed

Initiate with Buy and SAR 88 FVE Dallah Healthcare Holding offers direct exposure to private healthcare in KSA, and in

particular the premium healthcare industry in Riyadh. We believe that the premium

healthcare industry in KSA is attractive due to the marked differential in average claims (SAR

940/patient visit, vs. SAR 570, 65%), which in turn implies superior operating leverage. The

business is linked with a strong domestic brand name, and holds 16% of the market for private

hospital beds in Riyadh, which is substantial.

Exhibit 55: 46% of revenues are generated by insurance claimants, cash-paying patients accounted for 30% of revenues in FY 12A


Exhibit 56: Business volumes to double by FY17e; revenue mix to remain unchanged ………………………………………………………..


Exhibit 57: 370 new beds (2x) over the next 5 years drive patient admissions



Number of beds 361 352 352 422 422 422 722 722

Inpatient admissions growth 1.5% (2.8%) 9.5% 11.3% 3.8% 1.8% 12.7% 10.8%

Outpatient admissions growth 9.0% 7.2% 12.1% 8.8% 2.4% 1.2% 14.9% 12.9%


Bed capacity rollout to produce 16% 5-yr revenue CAGR in primary business lines: We expect

inpatient as well as outpatient visitation to rise c.2x by FY 17e following the planned expansion

in bed capacity (722 beds in FY 17e vs. 352 in H1 13A, 100% growth). Concurrently, the total

number of clinics operating within the Dallah network should reach 284 (vs. 139 clinics in FY

12A, +105%). Dallah intends to (i) launch a new paediatric building adjacent to its existing

hospital in Riyadh with a total capacity of 60 beds and 20 clinics, and (ii) build a new hospital in

West Riyadh with 300 beds and 80 outpatient clinics, which we expect to launch operations in

FY 16e.

Insurance companies

46%

Cash clients 30%

Companies 20%

Government 3%

Others 1%

Revenue breakdown by client FY 12A

264 265 313 355 376 397 463 536 261 304

359 399 416

501 605

713

27 32 49

57 65 81

102

115

--

200

400

600

800

1,000

1,200

1,400

1,600


Gross revenue breakdown by segment (SAR mn)

Inpatient revenues Outpatient revenues Pharma revenues Others

September 18 2013


The company’s pharmaceuticals vertical holds potential to post 5-yr CAGR of 17% as a result

of Dallah’s foray into the manufacture of medical and herbal products: Dallah initially held

exclusive distribution rights for 57 pharmaceutical and medical products and 8 cosmetic

brands, across the Kingdom. In H1 13A, the business acquired a manufacturing facility in

Jeddah for SAR 38mn, which allowed access to a portfolio of 30 medical and herbal products.

We expect the distribution portfolio and the newly introduced manufacturing line to

contribute 10% of revenues in FY 16e (currently 7%).

A mix of IPO proceeds and new debt to fund the roll out of Dallah’s growth strategy: The

CAPEX bill behind all projects amounts to SAR 610mn, of which SAR 100mn has been incurred,

with the remaining SAR 510mn financed through (i) SAR 360mn from IPO proceeds, (ii) an SAR

100mn soft loan from the Ministry of Finance at favorable terms, and (iii) SAR 49mn via

operations.

We warrant premium multiples: Our price target implies a c. 30% premium to the regional

peer group on FY 14e PE, which we find appropriate given (i) capacity-led growth, and (ii)

stronger pricing power vs. peers (30% cash-paying clients) at Dallah.

Exhibit 58: At par with local peers on FY 14e EPS

PE EV/EBITDA



Average local peers 23.0 19.3 16.9 16.2 13.9 12.3

Premium/ (discount) 13% 0% -7% 4% 1% -7%


Premium/ (discount) 24% 11% -1% 18% 15% 4%


September 18 2013


Valuation: Strongest EPS CAGR in our healthcare coverage space

warrants premium to regional peer set

40% upside potential to our FVE of 88/share; Initiate with Buy

15% discount to EM peers is unwarranted in context of margin strength and growth

Current market price reflects discount to Emerging peer set: current market valuation implies

a 15% discount to EM peers on FY 15e EPS. We argue for superior multiples in favour of

Dallah, given its substantial margin advantage (net margin 21% vs. 10% EM) and higher EPS

growth (18% vs.14% EM). We believe the market is overlooking the role of bed capacity growth

on EPS at current multiples. We initiate with a Buy recommendation and SAR 88 FVE.

Exhibit 59: Dallah trades at 10% discount to EM peers on FY 14e P/E, 15% on FY 15e P/E

Mkt Cap P/E EV/EBITDA RoE EBITDA margin Net margin EPS growth

Short Name Country (USDmn) FY 13e FY 14e FY 15e FY 13e FY 14e FY 15e FY 12A FY 12A FY 12A FY 12A

MEDICLINIC South Africa 6,197 21.4 21.4 18.6 12.9 14.1 14.1 12% 21% 6% 20%

LIFE HEALTHCARE South Africa 3,811 22.2 19.3 16.7 10.0 11.3 12.6 40% 26% 14% 17%

ODONTOPREV S.A. Brazil 2,137 25.4 22.1 19.9 13.2 15.2 17.6 20% 22% 15% 4%

APOLLO HOSPITALS India 1,885 33.5 33.5 27.3 14.1 17.3 17.3 10% 18% 7% 13%

DIAGNOSTICOS D.A. Brazil 1,521 24.7 16.2 14.0 7.0 8.1 9.5 3% 18% 4% NA

RAFFLES MEDICAL Singapore 1,329 25.9 22.8 20.0 14.1 16.2 18.3 16% 22% 18% 11%

FLEURY SA Brazil 1,262 20.1 15.5 12.9 6.8 8.0 9.4 6% 21% 7% 17%

EM average

24.8 21.5 18.5 11.2 12.9 14.1 15% 21% 10% 14%

Dallah KSA 777 26.0 19.3 15.7 16.8 14.0 11.4 12% 25% 21% 18%

Premium/(discount)

5% (10%) (15%) 50% 9% (20%)


September 18 2013


DCF summary



We value Dallah at SAR 88/share, implying 40% upside potential from current market price,

using DCF. We apply a WACC of 9.5% (11.0% Re, 0.85 Beta, 5% Rd) and a terminal growth rate

of 4%. Our price target implies a c.30% premium to regional peer group on FY 14e PE, which

we find appropriate given strong growth potential (20% 5-yr EPS CAGR) and higher price-

setting power vs. peers (30% cash-paying clients).

Risks Client composition: Dallah’s target patient subset (30% cash business) may drop in numbers

due to rising health insurance coverage among Saudis, affecting margins and working capital.

Delays in the launch of the West Riyadh Hospital (15% revenues in FY 17e).

Saudisation requirements may become more stringent, impacting EBITDA margins. A 10%

increase in wages produces a 1.5% cut to EBITDA margins and 6% to EV.

DCF summary


EBIT (1-τ) 103 144 182 236 251 309 369 392


EBITDA 140 185 229 284 307 379 443 467

Working Capital Changes (22) (12) (26) (39) (45) (92) (33) (32)


Purchase of PPE (257) (209) (188) (73) (83) (106) (111) (114)

Free Cash Flow to Firm (139) (35) 15 173 179 182 299 322


PV of Visible FCFF (41) (31) 12 128 121 112 169 166



PV of Visible FCFF 636 Rf 4.20%

PV of Terminal Value 3,135 EMRP 8.00%





Investments in associates 124

NCI -- Cost of Debt 5.00%

D/C (market) 25.00%




Implied multiples

EV/EBITDA 27.0 20.3 16.5 13.3 12.3 9.9 8.5 8.1

P/E 37.1 27.5 22.4 17.4 16.2 13.0 10.8 10.2

P/B 3.5 3.3 3.0 2.8 2.5 2.3 2.1 1.9

September 18 2013


Business trends

Exhibit 61: Outpatient visitation to nearly double by FY 17e


Exhibit 62: Inpatient visitation to rise on the launch of new facilities (namely West Riyadh Hospital, FY 16e)


Exhibit 63: Margins likely to dip on higher pre-operating costs of current expansion


Exhibit 64: Margins to revert to 20%+ NPM by FY 15e


Exhibit 65: We model for further leverage to fund growth


Exhibit 66: Free cash flow to turn positive by FY 15e


261 304 359 399 416 430

504 580

--

200

400

600

800

1,000

1,200

--

100

200

300

400

500

600

700


(SAR mn)

Outpatient revenues Outpatient admissions ('000)

264 265 313

355 376 390 449

507

--

5

10

15

20

25

30

35

40

45

50

--

100

200

300

400

500

600


(SAR mn)

Inpatient revenues Inpatient admissions ('000)

107 123

160 158

189

233

290 313

--

50

100

150

200

250

300

350

--%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%


(SAR mn)


94 113

133 112

151

186

238 257

--

50

100

150

200

250

300

--%

5.0%

10.0%

15.0%

20.0%

25.0%



--

50

100

150

200

250

300


Capex vs. borrowings (SAR mn)

Capex Debt

103 120 158 139 172 213 262 279

(30)(72)

(86)

(257)

(209) (188)

(65) (73)

(400)

(300)

(200)

(100)

--

100

200

300

400


FCF composition


September 18 2013


Appendix1: Financials and forecasts

Revenues: volume and pricing elements have driven 16% 3-yr CAGR

Over the past 3 years, revenue growth, which has been solid (16% CAGR) was driven by (i) rising inpatient

and outpatient visitation (89% revenues, 13% CAGR), (ii) a 7% increase in average fees, (iii) growth in

pharmaceuticals revenues (35% CAGR), and (iv) the introduction of the Operations and Management

segment (3% revenues).

-Hospital revenues grew at a CAGR of 13% over the past three years, driven mainly by rising patient

numbers, coupled with a 7% average increase in fees. Going forward, we forecast a 5-year inpatient

revenue CAGR of 17%, reaching SAR 771mn by FY 18e. This is the result of the addition of 70 beds within

a new pediatric unit (H2 13e), and 300 beds (FY 16e) at the West Riyadh hospital. With regards to the

outpatient segment, we forecast a 5-year outpatient revenue CAGR of 16%, as we expect outpatient

visitation to marginally outpace the growth in inpatient revenues. This is the result of the addition of 26

specialty clinics (in the pediatric unit) in FY 13e, 65 clinics by FY 15e within Riyadh hospital, and 80 clinics

by FY 16e in West Riyadh.

- Pharmaceutical revenues have exhibited a 35% CAGR (FY10-12A) on the back of volume growth during

the period. We see a robust 5-year CAGR (FY 13-18e) of 17% in pharmaceutical revenues (SAR 125mn in

FY 18e) going forward. Overall, we see the segment constituting 10% of overall revenues by FY 17e, vs.

7% in H1 13A.

-Operations and Management fees will contribute additional ancillary revenues, as Dallah has entered

into commercial agreements to manage hospitals owned by other parties, as part of its brand promotion

strategy. Currently, Dallah manages Al Khafgy hospital for an average annual fee of SAR 67mn, operating

100 beds and 13 clinics. In addition, Dallah manages the Mahayel Assir hospital at 100 beds and 25 clinics

at a total contract value of SAR 4.5mn, over and above the 10% fee it claims on the facility’s revenues.

The contracts generate recurring income until their expiration in 2016.

Margins

Our margin forecasts suggest EBITDA margin compression in FY 13-14e to 24%, as we assume a

weakening in blended bed utilization rates (along with a rise in operating costs) upon the launch of

Dallah’s pediatric unit (FY 13e), West Riyadh hospital (FY 16e) and the additional 65 beds (FY 15e) at its

existing facility (Riyadh Hospital). Overall, we see a drop in blended EBITDA margins to 22% in FY 13e and

24% in FY 14e.

We see an improvement in margins thereafter as we believe that (i) the pharmaceuticals business (10%

of revenues, FY 16e) should provide margin support in the long run, and (ii) the utilisation rate for the 65

beds and West Riyadh Hospital should gradually ramp up to normalized levels, at c. 55% on average.

Balance sheet

We expect further borrowings to fund expansion CAPEX: By H1 13A, Dallah held a net cash position of

SAR 272mn, having deployed c.50% of IPO proceeds. We expect the business to roll out c.SAR 600mn in

CAPEX over the next 3 years (SAR 508mn on West Riyadh Hospital and SAR 85mn on the addition of 65

clinics within the existing hospital in Riyadh). We incorporate a soft loan from the Ministry of Finance into

our leverage assumptions, which take total debt to c.SAR 150mn by FY 15e (10% D/E, 23x Interest cover).

We consequently expect pressure on free cash flows until FY 15e, largely due to the construction of the

West Riyadh Hospital. We model for positive free cash flow following the completion of the facility, which

we model for in FY 16e.

Dividends

We expect modest dividend payouts in the coming 4 years, as a result of Dallah’s CAPEX program, but

model for better dividend payouts (60%) starting FY 16e.


S e p t e m b e r 1 8 2 0 1 3



UAE – Healthcare and Pharmaceuticals

NMC Health

BUY

Healthcare and Pharmaceuticals / UAE Bloomberg code NMC LN

Market index ASX Index


Upside (%) 40.0



52 Week range 168.7-360.0

Market cap (GBPmn) 584


Average daily traded value (GBPmn) 0.35



Revenues 490.1 538.1 594.8 676.8

EBITDA 79.6 91.5 99.9 115.2

Net income 58.9 67.7 73.3 80.4

EPS 0.32 0.36 0.39 0.43

P/E (current price) 15.8 13.8 12.7 11.6

BVPS 1.8 2.1 2.4 2.7



Div. yield (%) — 1.5 1.6 1.7

FCF margin (%) (13.0) (17.0) (12.2) (3.9)

Net debt/EBITDA (x) 0.6 1.7 2.4 2.5

Net debt/Capital (%) 7.3 22.2 33.0 35.7

Interest cover (x) 5.3 4.4 4.9 5.5

RoAA (%) 11.0 9.0 9.0 9.1

RoAE (%) 27.3 19.0 17.8 17.0

RoIC (%) 16.1 16.1 16.2 15.7

Well-positioned for mandatory health cover in Northern Emirates

Cheapest valuation profile in our healthcare coverage space (12.7x FY 14e EPS, 9.8x EV/EBITDA): Initiate with Buy and GBp 440 FVE NMC Health offers diversified exposure to the UAE healthcare sector. NMC is a leading domestic healthcare provider with a solid track record of growth (EPS 3-yr CAGR 45%, nearly 2x peer average). We see the business as a strong beneficiary of mandatory health insurance coverage in Dubai and the Northern Emirates, regulation that is expected to be in effect in FY 14e. Taking precedent from Abu Dhabi’s introduction of similar regulation in 2007, we expect the process to catalyse a 4x increase in demand for medical services within a 3-year window across the industry. The business’s positioning via its (i) large presence in the UAE (3 Emirates), and (ii) aggressive expansion (+100% bed capacity, +115% healthcare revenues FY 18e) render it well-positioned for demand growth, and a direct beneficiary of regulatory catalysts. We initiate coverage on NMC with a Buy recommendation and a fair value estimate of GBp 440, offering 40% in upside potential vs. current price. Bed capacity roll out produces 5-yr healthcare revenue CAGR of 17%, but margins to remain flat. We see this resulting from (i) the launch of 4 new medical facilities (Brightpoint Hospital, DIP Hospital, Mussafah Day patient center, and Khalifa City Hospital), coupled with (ii) a ramp up in occupancy rates at existing hospitals- and in particular Al Ain Hospital and Dubai Hospital (on higher healthcare demand following the implementation of mandatory healthcare cover). To fund expansion, NMC raised USD 168mn in IPO capital in March 2012, which we believe will cover 55% of planned CAPEX. Margins: though we expect bed occupancy at existing medical facilities (Dubai and Al Ain) to improve in the short run, we suspect that pre-operating costs at Brightpoint hospital will render margins flat over the next 2 years. We see blended EBITDA margin at 17.6% in FY 16e (+140bps vs. FY 12A). Stock offers deep value, trades at deep discount to EM and regional peers: At 12.7x FY 14e P/E, NMC is the cheapest stock in our healthcare coverage space. We believe NMC is trading at an unwarranted 30% discount to peers, given its domestic footprint, access and exposure to regulatory catalysts, growth (3-yr EPS CAGR of 15%), and superior healthcare EBITDA margins of 28% (vs. 25% regional peers). We value NMC at GBp 440/share, implying 40% in upside potential from current price, using DCF.

Risks: Concentration risk: >30% of NMC’s distribution revenues dependent on 5 customers. Specialized doctor costs, which remain variable, may materially impact margins.

GBp 440


Price Performance

79

101

123

145

167

189

Sep-12 Dec-12 Mar-13 Jun-13

NMC LN

September 18 2013

NMC Health © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 40


Profitability

Growth

Gearing

Valuation

0%

10%

20%

2012 2013e 2014e 2015e 2016e


0%

50%

100%

150%

2012 2013e 2014e 2015e 2016e

Revenues Assets

0%

20%

40%

0.0

1.0

2.0

3.0

2012 2013e 2014e 2015e 2016e


0

10

20

30

2012 2013e 2014e 2015e 2016e

P/E P/E Sector

NMC Health

Year-end 2011 2012 2013e 2014e 2015e 2016e

Financial summary

Reported EPS 0.23 0.32 0.36 0.39 0.43 0.52

Diluted EPS 0.23 0.32 0.36 0.39 0.43 0.52

DPS — — 0.07 0.08 0.09 0.10

BVPS 0.54 1.79 2.06 2.37 2.72 3.14


Average market cap — 356 539 539 539 539

Year-end 2011 2012 2013e 2014e 2015e 2016e

Valuation metrics


P/E (x) (target price) 30.2 22.0 19.2 17.7 16.1 13.4



EV/FCF (x) (218.4) (32.6) (22.7) (28.7) (79.6) 124.8


Dividend yield (%) — — 1.5 1.6 1.7 2.1

Year-end 2011 2012 2013e 2014e 2015e 2016e

Growth (%)

Revenues 14.8 10.4 9.8 10.5 13.8 13.3

EBITDA 24.9 13.0 15.0 9.1 15.3 17.0

EBIT 36.5 24.3 11.1 10.3 10.3 17.0

Net income 103.8 37.0 15.0 8.2 9.7 20.2

Year-end 2011 2012 2013e 2014e 2015e 2016e

Margins (%)

EBITDA 15.9 16.2 17.0 16.8 17.0 17.6

EBIT 13.2 14.8 15.0 15.0 14.5 15.0

Net 9.7 12.0 12.6 12.3 11.9 12.6

Year-end 2011 2012 2013e 2014e 2015e 2016e

Returns (%)

RoAA 11.1 11.0 9.0 9.0 9.1 9.9

RoAE 42.3 27.3 19.0 17.8 17.0 17.8

RoIC 43.0 16.1 16.1 16.2 15.7 16.4

FCF margin (2.1) (13.0) (17.0) (12.2) (3.9) 2.2

Year-end 2011 2012 2013e 2014e 2015e 2016e

Gearing (%)

Net debt/Capital 45.3 7.3 22.2 33.0 35.7 32.8

Net debt/Equity 127.6 13.9 40.8 55.1 56.5 49.4

Interest cover (x) 3.4 5.3 4.4 4.9 5.5 6.3

Net debt/EBITDA (x) 1.8 0.6 1.7 2.4 2.5 2.1

September 18 2013



Company overview

NMC is a leading integrated healthcare provider in the UAE. The business is organised along 2 main segments: healthcare, and distribution and services. NMC currently operates 3 specialty hospitals in Abu Dhabi, Dubai and Al Ain, 1 general hospital in Dubai, 1 day patient medical center in Sharjah, and 8 pharmacies. In 2012, the company acquired an operating day patient medical center in Dubai- the BR Medical Suites in Dubai Healthcare City. In addition, the company plans to develop 2 new hospitals, and 2 medical centers. In 2012, the company’s facilities treated 1.27mn outpatients and 35.2k inpatients, operating 230 beds.


Shareholders

Bin Butti Saeed 28%

Shetty B R 20%

Bin Butti Khalifa 10%

Infinite Investments LLC 7%

Blackrock 4%

Others 1%

Public 30%

Source: Zawya

Board of Directors

Mr H J Mark Tompkins Chairman

Mr Khalifa Bin Butti Vice Chairman

Mr Justin A S Jew itt Director

Mr Patrick James Meade Director

Mr Heather Law rence Obe Director

HE Saeed Bin Butti Director

Mr Prasanth Manghat Board Secretary

Source: Zawya

NMC Health

Year-end 2011 2012 2013e 2014e 2015e 2016e

Income statement (USD mn)

Sales revenue 443.7 490.1 538.1 594.8 676.8 766.9

Gross profit 137.4 160.3 188.4 206.9 226.8 261.3

SG&A (66.9) (80.6) (96.9) (107.1) (111.7) (126.5)

EBITDA 70.5 79.6 91.5 99.9 115.2 134.7


EBIT 58.4 72.6 80.7 89.0 98.2 114.9






Income tax expenses — — — — — —

Minorities 0.8 0.9 0.7 0.7 0.8 1.0


Net profit 43.0 58.9 67.7 73.3 80.4 96.6



Year-end 2011 2012 2013e 2014e 2015e 2016e

Balance sheet (USD mn)


Receivables 153.5 181.4 206.4 236.3 274.4 315.2

Inventories 54.2 72.5 79.5 91.4 110.9 128.8


Other assets including goodwill — 2.6 2.6 2.6 2.6 2.6

Total assets 356.6 715.6 792.2 841.3 924.6 1,020.3

Payables 63.9 68.6 76.6 90.3 107.2 123.3




Shareholders equity 100.3 331.6 382.3 440.9 505.2 582.5

Minorities 1.1 1.9 2.6 3.4 4.2 5.2

Total liabilities & shareholders equity 356.6 715.6 792.2 841.3 924.5 1,020.3

Year-end 2011 2012 2013e 2014e 2015e 2016e

Cash flow (USD mn)


Net capex (20.4) (105.3) (147.7) (130.5) (84.8) (59.5)

Free cash flow (9.5) (63.9) (91.6) (72.6) (26.1) 16.7

Equity raised/(bought back) — 186.3 — — — —

Dividends paid — — (13.7) (14.7) (16.1) (19.3)

Net inc/(dec) in borrowings (39.9) 90.6 16.4 (25.0) — —


Net cash flow (24.4) 60.2 (89.0) (112.3) (42.2) (2.6)



September 18 2013


Well-positioned beneficiary of mandatory health cover in the

Northern Emirates

Cheapest valuation profile within our healthcare coverage space (12.7x FY 14e EPS, 9.7x EV/EBITDA); Initiate with Buy and GBp 440 FVE Leading healthcare provider operating in 3 emirates: During 2012, NMC operated 230beds,

and treated 35k inpatients and 1.27mn outpatients. The business claimed 20% and 23%

patients admitted into private healthcare facilities in Abu Dhabi in FY 11A and 12A,

respectively. It operates 3 specialty hospitals in Abu Dhabi (100 beds), Dubai (75 beds) and Al

Ain (45 beds), 1 general hospital in Dubai (10 beds), and 1 medical center in Sharjah. In

addition, it acquired Healthcare Suites, a high-end specialty day patient medical center

designed to attract highly-experienced global doctors, in 2012.

The business has positioned itself as a value service provider, pricing its services at a c. 35%

discount to comparable facilities, by our estimates. It is one of the largest hospital groups in

the UAE, holding 4% and 3% of the Abu Dhabi and Dubai healthcare markets, respectively (in

terms of bed capacity).

Exhibit 67: FY 12A revenue split by business line


Exhibit 68: FY 12A healthcare revenue by geography


NMC health offers broad exposure to growth in the UAE healthcare sector (13% CAGR in

government healthcare spending over the FY 08-12A period). NMC operates 6 hospital

facilities that house 230 beds, and account for a 3% share of the overall healthcare market in

the UAE, and has a 37-year track record in the country. Growth in recent years has been stellar

(3-yr EPS CAGR 45%), driven largely by a surge in demand for healthcare services following the

implementation of mandatory health insurance cover in Abu Dhabi in 2007.

Mandatory health insurance in Dubai and the Northern Emirates to act as an industry game-

changer: Following Abu Dhabi’s precedent, Dubai’s mandatory health coverage scheme is

expected to take effect in FY 14e, raising healthcare coverage to 100% (from 40% currently)

over a 3-yr period, by our estimates. We see a direct correlation between the availability of

insurance coverage and the use of health services. As such, we model for a ramp up in

utilization rates at medical facilities located in Dubai and the Northern Emirates to an average

of 65-70% in FY 16e, from <55% today.

Healthcare, 48%Distribution,

52% Abu Dhabi , 65%

Dubai and Northern

Emirates, 35%

September 18 2013


Exhibit 69: 4 new facilities over the next 4 years produce 2x growth in bed capacity

FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Healthcare revenues (USD mn) 252 272 311 353 404 425

% growth 15% 8% 14% 14% 14% 5%

bed capacity 230 280 415 465 640 640

% growth 0% 22% 48% 12% 38% 0%

Total patients (mn) 1.89 1.94 2.15 2.42 2.70 2.91

% growth 10% 3% 11% 13% 12% 8%


Bed capacity roll out to produce 5-yr healthcare revenue CAGR of 17%:. We see this resulting

from (i) the launch of 4 new medical facilities (Brightpoint Hospital, DIP Hospital, Mussafah Day

patient center, and Khalifa City Hospital), coupled with (ii) a ramp up in occupancy rates at

existing hospitals- and in particular Al Ain Hospital and Dubai hospital (on higher healthcare

demand following the implementation of mandatory healthcare cover).

Margins: though we expect bed occupancy at existing medical facilities (Dubai and Al Ain) to

improve in the short run, we suspect that pre-operating costs at Brightpoint and DIP hospitals

will render margins flat over the next 2 years. We see EBITDA margin at 18% in FY 16e

(+180bps vs. FY 12A).

Discount to regional and emerging peers is unwarranted: We value NMC at GBp 440/share,

implying 40% in upside potential from current market price, using DCF. We believe NMC is

trading at an unwarranted 30% and 40% discounts to regional and emerging peers,

respectively, given (i) its access and exposure to regulatory catalysts, (ii) strong growth outlook

(5-yr revenue CAGR of 17%, a result of the 4 new facilities that will be launched in the coming

year), and (iii) superior healthcare EBITDA margins of 28% (vs. 25% for regional peers).

Exhibit 70: NMC currently trades at a deep discount to EM on FY 13-14e EPS

P/E EV/EBITDA RoE EBITDA margin Net margin EPS growth

FY 13e FY 14e FY 15e FY 13e FY 14e FY 15e FY 12A FY 12A FY 12A FY 12A

EM healthcare peers 24.8 21.5 18.5 11.2 12.9 14.1 15% 21% 10% 14%

NMC Health 13.8 12.7 11.5 10.7 9.8 8.5 18% 28% 12% 37%

Premium/(discount) to peers (44%) (41%) (38%) (6%) (24%) (40%)


September 18 2013


Valuation: 30% discount to regional peer group, 40% to EM set. Stock

should re-rate on multiple expansion. Market yet to acknowledge

superior growth (15% EPS CAGR) and EBITDA margins (28% vs. 25%

peers)

40% upside to current market price; Initiate with Buy and GBp 440/share FVE

Exhibit 71: Unwarranted 30% discount to regional peer group on FY 14e current P/E

PE EV/EBITDA



Mouwasat 18.1 15.2 14.2 14.7 12.2 11.9

National Medical Care 24.8 23.4 20.8 17.1 15.5 13.6

NMC Health 13.8 12.7 11.5 10.7 9.8 8.5

Al Noor Hospitals Group 23.1 17.5 17.2 12.5 10.0 9.7


Premium/ (discount) -35% -28% -27% -26% -20% -23%


At 12.7x FY 14e P/E, NMC is the cheapest stock in our healthcare coverage space. We believe

the market has assigned an unwarranted 30% discount on NMC vs. regional peers. The

business continues to exhibit growth on par with the industry, and margins that are ahead of

comparable businesses. Regulatory change will act as a positive demand catalyst in the next 2

years, and no other healthcare stock in MENA affords access to the implementation of

mandatory health cover in Dubai and the Northern Emirates.

Exhibit 72: Market discounting NMC on low blended margins (due to

distribution business) but ignores (i) superior healthcare margins (28% NMC vs. 25% peers) and (ii) strategic value of distribution business


Exhibit 73: Attractive in terms of EPS CAGR: growth outlook second only to Dallah (Buy, SAR 88), but market valuation remains cheapest among peers …………………………………………………………


DALLAH

MOUWASAT

CARE

NMC

Al Noor

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

15% 20% 25% 30% 35%

FY 14e EBITDA margin

PE 14e

DALLAH

MOUWASAT

CARE

NMC

Al Noor

10

12

14

16

18

20

22

24

5% 10% 15% 20% 25%

5-yr EPS CAGR

PE 14e

September 18 2013


Cheap in EM context We place our valuation in an EM context: current market valuation implies a >35% discount to

EM peers on FY 13-15e EPS, which we find offers a highly attractive entry point given superior

margins (EBITDA margin 28% vs. 21% EM) and above-average returns (RoE 18% vs.15% EM).

Exhibit 74: NMC currently trades at a deep discount to EM on FY 13-14e EPS









FLEURY SA Brazil 1,262 20.1 15.5 12.9 6.8 8.0 9.4 6% 21% 7% 17%

EM average

24.8 21.5 18.5 11.2 12.9 14.1 15% 21% 10% 14%

NMC Health UAE 919 13.8 12.7 11.4 10.7 9.8 8.5 18% 28% 12% 37%

Premium/(discount)

(45%) (41%) (38%) (13%) (24%) (40%)


Risks Further delays in the launch of Brightpoint hospital (FY 17e 10% healthcare revenues, 22%

bed count), which was initially set for opening in H2 12. Concentration: With >30% of NMC’s

distribution revenues dependent on 5 customers, this suggests downside risk in the event of a

loss of exclusive distribution rights for this specific subset of suppliers. Higher than expected

specialised doctors costs could materially impact margin and cash flows.

September 18 2013


DCF summary

We value NMC at GBp 440/share, implying 40% in upside potential from current market

price, using DCF. We apply a WACC of 9.7% (11.3% Re, 0.9 Beta, 5% Rd) and a terminal growth

rate of 4%. Our price target implies FY 14e/15e P/E of 17.1x and 15.6x.

Exhibit 75: DCF valuation summary


Exhibit 76: DCF sensitivity to valuation parameters


DCF summary

USDmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e FY 18e FY 19e FY 20e

EBIT (1-τ) 82 89 98 115 131 155 169 174


EBITDA 92 100 115 135 152 180 194 201



Purchase of PPE (148) (130) (85) (60) (44) (49) (51) (53)

Free Cash Flow to Firm* (80) (59) (10) 33 72 88 122 123


PV of Visible FCFF (23) (52) (8) 24 49 54 68 63



PV of Visible FCFF 174 13% Rf 4.5%





Less: Net (Debt) Funds (303) Marginal tax rate

Investments in associates --

NCI (3) Cost of Debt 5.0%

D/C (market) 25.0%



Equity Value per Share (GBp) 440

Implied multiples

EV/EBITDA 14.3 13.1 11.4 9.7 8.6 7.3 6.7 6.5

P/E 18.2 17.1 15.6 13.0 11.1 9.0 8.2 7.8

P/B 3.28 2.84 2.48 2.15 1.86 1.60 1.38 1.21

DCF sensitivity- Risk-free rate vs. Terminal growth DCF sensitivity- leverage vs. cost of debt

Rf Growth D/(D+E) Cost of debt

440 3.00% 3.50% 4.00% 4.50% 5.00% 440 4.00% 4.50% 5.00% 5.50% 0.50%

5.50% 326 348 374 404 439 15.00% 396 390 383 377 445

5.00% 350 376 405 440 481 20.00% 429 420 410 401 506

4.50% 378 407 440 481 530 25.00% 467 453 440 428 582

4.00% 408 441 481 528 587 30.00% 510 491 474 458 679

3.50% 443 481 528 584 655 35.00% 560 535 512 490 805

DCF sensitivity- Beta vs. Terminal growth DCF sensitivity- leverage vs. cost of equity

Beta Growth D/(D+E) cost of equity

440 3.40% 3.70% 4.00% 4.30% 4.60% 440 12.90% 11.90% 10.90% 9.90% 8.90%

0.90 376 393 412 432 455 15.00% 293 345 413 503 630

0.85 400 419 440 464 490 20.00% 315 370 441 535 667

0.8 427 449 472 499 529 25.00% 341 398 472 571 707

0.75 457 481 508 538 573 30.00% 369 430 507 610 751

0.70 490 518 548 583 623 35.00% 402 466 547 654 801

September 18 2013


Business trends

Exhibit 77: NMC revenues evenly split between healthcare and distribution business lines


Exhibit 78: Expansions and improvement in bed utilisation rates drive healthcare revenue CAGR > 14%


Exhibit 79: Margins to remain flat with the opening of new hospitals…


Exhibit 80: ...but are expected to improve as utilization rates on new facilities ramp up in FY 15e


Exhibit 81: Leverage to rise to fund expansion (USD 290mn CAPEX)


Exhibit 82: FCF to turn positive in FY 15e+


182 219 252 274 313 377 448 506

229 253

271 294

316 339

364 387

--

100

200

300

400

500

600

700

800

900

1,000


Revenue breakdown by segment (USD mn)

Healthcare revenues Distrubution revenues

--

50

100

150

200

250

300

350

400

450


Healthcare revenues by hospital (USD mn)

AD specialty Dubai specialty Al Ain specialty Dubai general Sharjah MC

Health Suites Brightpoint Mussafah DIP Khalifa City

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

--

20

40

60

80

100

120

140

160

180


(USD mn)


5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

--

20

40

60

80

100

120


(USD mn)


-

0.5

1.0

1.5

2.0

2.5

--

20

40

60

80

100

120

140

160


(USD mn)

Capex Net D/E

-20%

-15%

-10%

-5%

0%

5%

10%

15%

(100)

(80)

(60)

(40)

(20)

--

20

40

60

80

100


(USD mn)

FCF FCF margin

September 18 2013


Appendix 1: Leading healthcare provider and distributor

NMC is a leading integrated private healthcare provider in the UAE, in terms of patient

visitation and bed capacity. During FY 12A, the business operated 230 beds and treated

c.1.5mn patients at its network of facilities in the UAE. The network includes hospitals, a day

patient medical center, and pharmacies across the UAE, placing it as one of the largest

integrated private sector healthcare companies in the region.

The business is best viewed as 2 distinct segments: (i) healthcare, and (ii) distribution and

services.

Healthcare

Existing facilities

NMC currently operates 3 specialty hospitals in Abu Dhabi, Dubai and Al Ain, 1 general hospital

in Dubai, and 1 medical center in Sharjah. During 2012, the company acquired healthcare

Suites from Dr. B.R Shetty, current NMC CEO, for a total consideration of USD 9mn. Thereafter,

NMC incurred a further c.USD 5mn on equipment and refurbishment costs related to the

facility. Healthcare Suites is a high-end specialty day patient medical center in Dubai

Healthcare City launched in 2011. The 3 specialty hospitals enjoy high bed occupancy rates

(with the Abu Dhabi NMC facility registering the highest rates, at 68% in FY 12A), and provide

treatments in over 30 medical departments. Medical departments include specialty services in

cardiology, cardiothoracic surgery, endocrinology, gastroenterology, in-vitro fertilisation,

nephrology and dialysis, neurology and neurosurgery, oncology, paediatrics and neonatology,

pulmonology and urology. Medical centers in the NMC network, on the other hand, offer

general medical services serving residents in the emirates of Dubai, Sharjah and Ajman.

Exhibit 83: NMC- existing healthcare facilities

Existing facilities Region Date of

establishment No. Of

beds Bed

occupancy Total patient

admissions

Abu Dhabi Specialty hospital

Abu Dhabi 1976 100 68% 911,172

Dubai Specialty hospital Dubai 2004 75 56% 305,776

Al Ain Specialty hospital Al Ain 2008 45 56% 367,811

Dubai General hospital Dubai 1999 10 38% 201,308

Sharjah Medical Center Sharjah 1996 NA NA 121,171


Expansion plans

(i) Brightpoint Maternity Hospital (Abu Dhabi): NMC is developing a specialty

hospital focused on maternity and pediatric care, and aimed at capitalizing on the

demand for maternity services in the UAE. While the hospital is licensed to

operate 100 beds, only 50 beds will be operational by the launch of the facility in

H2 13e.

September 18 2013


(ii) Mussafah Medical Center (Abu Dhabi): NMC is also developing a new day patient

medical center in Mussafah, a suburb of Abu Dhabi, which we expect to begin

operations later this year. The Mussafah facility will be a general practice day

patient medical center, serving as a group of referral clinics to NMC’s specialty

hospitals. The facility consists of a 2-floor center supported by a pharmacy.

(iii) Dubai Investment Park Hospital (Dubai): Originally planned for launch as a

medical center, the DIPH facility is a general hospital aimed at catering to the

suburban industrial zones on the outskirts of Dubai. Management guidance is for

launch in Q2 14e, at a capacity of 60 beds.

(iv) Khalifa City Hospital: Catering to the growing population of Abu Dhabi’s suburbs,

such as Mussafah, Baniyas and Shahama, NMC is developing a new hospital

facility in Khalifa City, Abu Dhabi. The land for the Khalifa City Hospital has been

granted by the Abu Dhabi Municipality for a nominal annual fee. Construction

work began in 2012, and is due for completion by mid-2014. Khalifa City Hospital

will open at a capacity of 100 beds, and focus on 4 medical specialties

(paediatrics, endocrinology, oncology and cardiology). The hospital is later

expected to expand its bed capacity to 250.

Exhibit 84: 4 new facilities over the next 2 years

Under construction facilities Region Timeline Remaining capex No. Of beds

Brightpoint Hospital Abu Dhabi Q3 13e 20 50

Mussafah Medical Center Abu Dhabi Q4 13e 10 10

DIP Hospital Dubai Q1 14e 40 30

Khalifa City Hospital Abu Dhabi Q1 15e 220 250


Distribution and services

The segment entails distributing pharmaceutical products, FMCGs (which include both food

and non-food items), educational supplies, cosmetic products, medical and scientific

equipment and veterinary products- over 50,000 products in total, across the UAE. The

segment represents 52% of NMC’s revenues, and 30.5% of EBITDA, as of FY 12A. NMC’s D&S

segment is vertically integrated, and supplies all of the hospitals operated by NMC, in

additional to a broad platform of other hospitals, pharmacies, laboratories, government

institutions (such as the Ministry of Health), and retail outlets in the UAE (such as Boots and

Carrefour).

Exhibit 85: Top 5 suppliers of D&S business in FY 11A

Supplier Segment % of FY 11A distribution revenues

Beiersdorf FMCG 18%

Pfizer Pharma 12%

Jamjoom Pharma 4%

Himalaya FMCG 4%

Unza FMCG 3%



S e p t e m b e r 1 8 2 0 1 3



Saudi Arabia – Healthcare and

Pharmaceuticals National Medical Care Co.

HOLD

Healthcare and Pharmaceuticals / Saudi Arabia Bloomberg code CARE AB



Upside (%) -11.5



52 Week range 49.6-200.0






Revenues 524.7 557.7 600.5 676.8

EBITDA 131.9 134.9 145.5 163.7

Net income 105.0 97.1 103.0 115.6

EPS 2.34 2.16 2.30 2.58

P/E (current price) 23.0 24.8 23.4 20.9

BVPS 13.6 18.5 19.6 20.9



Div. yield (%) 2.0 2.2 2.1 2.4

FCF margin (%) (0.7) (2.6) (2.2) 10.7

Net debt/EBITDA (x) (0.3) (1.1) (0.6) (0.6)

Net debt/Capital (%) (6.2) (16.0) (8.0) (8.9)

Interest cover (x) — 20.5 16.5 15.1

RoAA (%) 14.2 10.3 8.9 9.2

RoAE (%) 18.1 13.5 12.0 12.7

RoIC (%) 15.4 10.6 10.1 10.7

Fundamentals fully priced in at 23.4x FY 14e P/E, 15.7x EV/EBITDA; Initiate with a Hold recommendation and SAR 48 FVE National Medical Care- CARE holds the second largest network of

hospital bed in the Kingdom (420 in FY 12A), and is active in the

wholesale and distribution of pharmaceutical and medical products in the

country. We believe that the market is fully pricing in the impact of bed

capacity additions on growth. We initiate coverage on CARE with a Hold

recommendation and a fair value estimate of SAR 48.

Growth is a function of bed capacity expansion, which will total 200

additional beds at its National hospital facility (+48%), taking its share of

the Riyadh market to 16% from 12% today. Coupled with the roll out of 4

family health centers in the city by FY 16e, we expect the business’s

capacity roll out generating 9% revenue CAGR over the next 5 years. We

expect operating margins to reflect mild compression in FY 13-15e (-

140bps in GPM, -90bps in EBITDA margins) as we forecast (i) a rise in

staffing costs, associated with the launch of the new building at National

Hospital (H1 14e), and (ii) greater revenue contribution from CARE’s PDM

unit, which operates at vastly lower margins (2%). We expect a degree of

margin support starting FY 16e, as we believe scale economies and rising

bed utilisation rates will begin to filter through P&L on the launch of a new

wing at the National Hospital, which will include a premium healthcare

offering.

Corporate accounts represent 53% of client base, and service

agreements are periodically renewed. The General Organisation for

Social Insurance- GOSI, is CARE’s largest shareholder (35% stake), and

accounts for 20% of client business. We believe that as large corporate

entities continue to migrate towards greater and more sophisticated

insurance cover for their employees, healthcare providers will experience

a degree on P&L pressure as payments collected from insurers are

typically lower (we estimate as much as 25%) than what is otherwise

collected from ‘direct payment’ clients.

Valuation: We value CARE at SAR 48/share, using DCF and a WACC of

9.8% (11.4% Re, 0.9 Beta, 5% Rd) and a terminal growth rate of 4%. At

23.4x FY 14e, EPS, CARE trades at 35% and 20% premiums to regional and

local peers which we warrant on CARE’s competitive position (16% market

share in Riyadh, FY 14e). We initiate with a Hold recommendation. Risk:

The shift to insurance-based patient collections may cut EBITDA margin by

150bps+ on average.

SAR 48


Price Performance

90

158

226

294

362

430

Mar-13 Jun-13 Sep-13

CARE AB SASEIDX

September 18 2013

National Medical Care Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 51


Profitability

Growth

Gearing

Valuation

0%

10%

20%

30%

2012 2013e 2014e 2015e 2016e


0%

20%

40%

2012 2013e 2014e 2015e 2016e

Revenues Assets

-20%

-10%

0%

-1.5

-1.0

-0.5

0.0

2012 2013e 2014e 2015e 2016e


0

10

20

30

2012 2013e 2014e 2015e 2016e

P/E P/E Sector

National Medical Care Co.

Year-end 2011 2012 2013e 2014e 2015e 2016e

Financial summary

Reported EPS 2.11 2.34 2.16 2.30 2.58 2.82

Diluted EPS 2.11 2.34 2.16 2.30 2.58 2.82

DPS 0.64 1.06 1.17 1.15 1.29 1.41

BVPS 12.32 13.60 18.50 19.65 20.94 22.35


Average market cap — — 2,472 2,472 2,472 2,472

Year-end 2011 2012 2013e 2014e 2015e 2016e

Valuation metrics


P/E (x) (target price) 22.5 20.3 22.0 20.7 18.4 16.8



EV/FCF (x) 77.8 (543.2) (139.0) (153.7) 27.5 18.4


Dividend yield (%) 1.2 2.0 2.2 2.1 2.4 2.6

Year-end 2011 2012 2013e 2014e 2015e 2016e

Growth (%)

Revenues 7.5 14.5 6.3 7.7 12.7 9.7

EBITDA 13.7 8.4 2.3 7.8 12.6 8.2

EBIT 16.0 9.3 (2.6) 8.1 13.9 9.4

Net income 11.8 10.8 (7.5) 6.1 12.2 9.6

Year-end 2011 2012 2013e 2014e 2015e 2016e

Margins (%)

EBITDA 26.6 25.1 24.2 24.2 24.2 23.9

EBIT 20.8 19.8 18.2 18.2 18.4 18.4

Net 20.7 20.0 17.4 17.2 17.1 17.1

Year-end 2011 2012 2013e 2014e 2015e 2016e

Returns (%)

RoAA 14.7 14.2 10.3 8.9 9.2 9.5

RoAE 18.2 18.1 13.5 12.0 12.7 13.1

RoIC 16.1 15.4 10.6 10.1 10.7 10.9

FCF margin 5.6 (0.7) (2.6) (2.2) 10.7 14.6

Year-end 2011 2012 2013e 2014e 2015e 2016e

Gearing (%)

Net debt/Capital (16.2) (6.2) (16.0) (8.0) (8.9) (12.3)

Net debt/Equity (16.2) (6.6) (17.9) (9.5) (10.5) (14.3)

Interest cover (x) — — 20.5 16.5 15.1 16.8

Net debt/EBITDA (x) (0.7) (0.3) (1.1) (0.6) (0.6) (0.8)

September 18 2013



Company overview

National Medical Care owns and operates 2 hospitals in Riyadh with a total capacity of 420 beds and 100 clinics. Both hospitals were owned by the General Organisation for Social Insurance (GOSI) prior to 2003. In March 2013, National Medical Care Company launched an Initial Public Offering and raised SAR 175mn in the process.


Shareholders

General Organization for Social Insurance- Saudi Arabia35.1%

Fal Holdings Arabia Company 26.6%

Public 38.3%

Source: Zawya

Board of Directors

AbdullahBinMOhammed Al Issa Chairman

Adbulaziz Saif Al Saif Director

Yasser Saqr Al Otaibi Director

Bader Fahad Al Athel Director

Adeeb AbdulrahmanAl Sowailim Director

Dr. Shwaimi Hwaimel Al Fowiz Director

Adel Mohammed Al Krashe Director


National Medical Care Co.

Year-end 2011 2012 2013e 2014e 2015e 2016e


Sales revenue 458.3 524.7 557.7 600.5 676.8 742.5

Gross profit 122.4 135.1 134.8 145.6 165.4 181.1

SG&A (27.3) (31.1) (33.5) (36.0) (40.6) (44.6)

EBITDA 121.7 131.9 134.9 145.5 163.7 177.2


EBIT 95.2 104.0 101.4 109.6 124.8 136.5

Net interest income(expense) — — (4.9) (6.7) (8.3) (8.1)





Zakat (6.3) (6.4) (6.8) (7.3) (8.3) (9.1)



Net profit 94.7 105.0 97.1 103.0 115.6 126.7



Year-end 2011 2012 2013e 2014e 2015e 2016e



Receivables 165.5 190.6 204.7 225.4 257.7 284.8

Inventories 27.8 35.3 41.7 47.4 54.6 61.5



Total assets 684.6 794.7 1,091.3 1,221.9 1,291.5 1,370.7

Payables 48.9 62.1 68.4 74.8 85.5 95.4

Interest bearing debt — 31.7 98.9 167.1 162.9 162.9



Shareholders equity 552.8 610.1 829.7 881.2 939.0 1,002.3


Total liabilities & shareholders equity 684.6 794.7 1,091.3 1,221.9 1,291.5 1,370.7

Year-end 2011 2012 2013e 2014e 2015e 2016e

Cash flow (SAR mn)


Net capex (63.9) (120.9) (134.3) (136.5) (58.4) (40.6)

Free cash flow 25.7 (3.7) (14.4) (13.0) 72.6 108.6


Dividends paid (28.6) (47.6) (52.5) (51.5) (57.8) (63.3)

Net inc/(dec) in borrowings — 31.7 67.2 68.2 (4.3) —

Other investing/financing cash flows (0.6) — — — — —

Net cash flow (3.5) (19.6) 0.3 3.7 10.5 45.2



September 18 2013


Market fully pricing in expansion growth; Initiate with a Hold

recommendation and SAR 48 FVE

National Medical Care- CARE is a pure play on the middle income segment of the Saudi

healthcare sector, particularly in Riyadh, where it ranks second in terms of bed capacity (420

beds in FY 12A). CARE has expanded its capacity in National Hospital threefold to 300 beds,

and is due to establish 4 dispensaries by FY 16e (line 1 in H2 13e). The business is further

deploying capital towards its Pharmaceutical and Medical Distribution unit, which was

established in FY 11A as a local wholesaler. The unit has acquired exclusive distribution rights

for medical drugs and equipment in KSA. We initiate coverage on CARE with a Hold

recommendation and a fair value estimate of SAR 48, as we believe that the market is pricing

in the impact of capacity additions (+48%) on growth.

Exhibit 86: Bed capacity adds (+48%) by FY 14e



Number of beds 420 420 420 420 620 620 620 620

Inpatient admissions (000') 18 18 20 20 20 22 23 24

Outpatient admissions (000') 512 500 523 539 581 628 673 712


48% bed capacity additions to bolster market share: Care will add 200 beds at National

Hospital (+48%), raising its total bed capacity across its facilities to 620 by FY 14e (16% share of

the Riyadh market). Furthermore, it intends to build 4 fully-serviced family healthcare centers

in Riyadh, and management expects to open its first dispensary later this year. The 4 centers

are due for launch in FY 16e. The impact on revenues should be tangible, as we expect 5-yr

revenue CAGR of 9% on a rise in inpatient as well as outpatient visitation.

Exhibit 87: The proportion of revenues derived from insurance-based patients is associated with lower margins (due to discounts), contributing least to EBITDA levels


34% 32%

34% 36%

39%

33%

14% 18%

20%

16% 12% 13%

--%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY 10A FY 11A H1 12A

Revenue breakdown by client

Insurance companies Direct companies GOSI Cash clients

September 18 2013


Corporate clients and the General Organisation for Social Insurance (GOSI) are the largest

contributor to revenues at 53% of CARE’s client base: GOSI (20%) and Aramco (16%) are core

clients. This introduces earnings visibility as service agreements are renewed over 5-year

periods. The 5-yr contract with GOSI (CARE’s largest shareholder with a 35% stake) expires in

FY 15e. Despite medium term visibility on revenue growth, we remain cautious on the impact

of the shift in corporate clients towards insured health cover, which would impact CARE’s

margins due to (i) the higher discounts granted to insurance companies on patient claims (we

estimate 25%), and (ii) higher working capital requirements.

We value CARE at SAR 48/share and initiate coverage with a Hold recommendation. Our DCF

exercise suggests that the business is trading at the upper end of the multiple range for the

KSA healthcare sector, which in an EM and regional context, remains defendable.

Exhibit 88: CARE currently trades at <10% premium to EM comparables on FY 14e EPS

Mkt Cap P/E EV/EBITDA RoE EBITDA mgn Net mgn EPS grwth


EM average

24.8 21.5 18.5 11.2 12.9 14.1 15% 21% 10% 14%

CARE KSA 643 24.8 23.4 20.9 16.9 15.7 13.9 17% 25% 20% 11%

Premium/(discount)

0% 9% 13% 51% 21% (2%)


September 18 2013


Valuation: At 23.4x/20.9x FY 14e/15e P/E, CARE trades at the

upper end of the KSA healthcare multiple range. Initiate with

Hold, SAR 48 FVE

We value CARE at SAR 48/share, using DCF and a WACC of 9.8% (11.4% Re, 0.9 Beta, 5% Rd)

and a terminal growth rate of 4%. Our price target implies FY 14e P/E of 20.7x, at par with

CARE’s regional peer group (20.6x FY 14e).



Risks

Downside risk: Delays in the launch of a new wing at the National Hospital could negatively

impact our revenue forecasts as early as FY 14e. The shift towards insurance-based patient

collections may drive down EBITDA margin by 150bps annually. Upside risk: higher bed

occupancy and clinic utilisation rates than anticipated.

DCF summary


EBIT (1-τ) 95 102 116 127 141 156 163 170


EBITDA 128 138 155 168 185 210 220 229



Purchase of PPE (134) (136) (58) (41) (40) (44) (45) (47)

Free Cash Flow to Firm (20) (18) 68 103 123 140 163 171


PV of Visible FCFF (6) (16) 55 76 83 85 90 86



PV of Visible FCFF 454 23% Rf 4.2%








D/C (market) 25.00%




Implied multiples

EV/EBITDA 15.6 14.5 12.9 11.9 10.8 9.5 9.1 8.8

P/E 22.0 20.7 18.5 16.8 15.3 13.8 13.1 12.6

P/B 2.6 2.4 2.3 2.1 2.0 1.9 1.7 1.6

September 18 2013


Relative value

Exhibit 90: <10% premium to EM peer set at FY 14e P/E and EV/EBITDA









FLEURY SA Brazil 1,262 20.1 15.5 12.9 6.8 8.0 9.4 6% 21% 7% 17%

EM average

24.8 21.5 18.5 11.2 12.9 14.1 15% 21% 10% 14%

CARE KSA 643 24.8 23.4 20.9 16.9 15.7 13.9 17% 25% 20% 11%

Premium/(discount)

0% 9% 13% 51% 21% (2%)


CARE currently trades at a FY 14e P/E and EV/EBITDA of 23.4x and 15.7x, respectively, at <10%

premium to emerging market comparables. Market multiples remain stretched as the

business does not reflect the same capacity growth drivers found elsewhere in the KSA

healthcare space, but nevertheless demonstrates margins in-line with best-in-class EM peers.

Valuation sensitivity

Exhibit 91: DCF sensitivity to growth assumptions


Exhibit 92: DCF sensitivity to cost assumptions


DCF sensitivity- Risk-free rate vs. Terminal growth

Rf Growth

48 3.40% 3.70% 4.00% 4.30% 4.60%

4.80% 41 42 44 46 47

4.50% 43 44 46 47 49

4.20% 44 46 48 50 52

3.90% 46 48 50 52 54

3.60% 48 50 52 54 57

DCF sensitivity- Cost of debt vs. D/E

Cost of debt D/(D+E)

48 15.00% 20.00% 25.00% 30.00% 35.00%

6.00% 42 43 45 48 50

5.50% 42 44 46 49 52

5.00% 43 45 48 51 54

5.50% 42 44 46 49 52

6.00% 42 43 45 48 50

September 18 2013


Business trends

Exhibit 93: Inpatient and surgery contributions to remain >50%


Exhibit 94: Patient treatments to reach 735K by FY 17e


Exhibit 95: Slight margin compression in FY 13e with the launch of the new wing at the National Hospital


Exhibit 96: Which will filter through to net income


Exhibit 97: Capex vs. borrowings


Exhibit 98: Free cash flows to turn positive by FY 15e


271 298 342 349 366 407 436 459

58 60

62 65 71 79

86 93

98 97

106 117 129

141 153

166

--3

15 27

34

50 68

86

--

100

200

300

400

500

600

700

800

900


Revenue breakdown by segment (SAR mn)

Inpatients and surgeries outpatients Pharmacy Medical distribution unit

--

100

200

300

400

500

600

700

800

--

5

10

15

20

25


('000)('000)

Number of inpatient visits Number of outpatient visits

107 122

132 135 145

164 177

195

--

50

100

150

200

250

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


(SAR mn)


85 95

105 97

103 116

127 140

--

20

40

60

80

100

120

140

160

--%

5.0%

10.0%

15.0%

20.0%

25.0%


(SAR mn)


--

20

40

60

80

100

120

140

160

180


(SAR mn)

Capex Debt

101 115 125 128 138 155 168 185

(60)

(64)(121)

(134) (136) (58)(41) (40)

(200)

(150)

(100)

(50)

--

50

100

150

200

250


FCF composition (SAR mn)


September 18 2013


Appendix 1: Financials and forecasts

Revenues

Over the past 3 years, revenues have grown at a modest CAGR of 11% driven by (i) a rise in

inpatient admissions and surgeries (+7%), (ii) outpatient visits (+2%), (iii) pharmaceutical

revenues (+8%). In 2011, the business introduced a new distribution unit for medical products,

which produced 3% in revenue accretion in FY 12A.

(i) Inpatients and surgeries: inpatient and surgery revenues grew at a CAGR of 12% over

the past 3 years, driven largely by bed utilization, and a 9% average increase in claims

per patients. We forecast a 3-year inpatient revenue CAGR of 8%, reaching SAR 440n

by FY 16e. This is the result of the addition of 200 beds to CARE’s National Hospital

(H1 14e), which we expect to operate at comparatively low (but rising) bed utilization

over the coming 4 quarters.

(ii) Outpatients: Outpatient revenues have demonstrated relatively weaker growth (3%

3-yr CAGR FY10-12A), as outpatient volumes and claims remained largely flat during

the past 3 years. Going forward, we expect outpatient revenue to grow at a CAGR of

10% as the business rolls out 4 family healthcare centers near its existing hospitals,

with the first center expected to be launched Q4 13e.

(iii) Pharmaceutical revenues have exhibited a 4% CAGR (FY10-12A, largely on volumes

sold rather than any strengthening in product prices. We see a modest 3-year CAGR

(FY 13-16e) of 9% in pharmaceutical revenues (SAR 153mn in FY 16e), totaling 20% of

aggregate sales, going forward.

(iv) Pharmaceutical and medical distribution (PMD): in 2011, CARE established a

distribution unit dedicated to medical and pharmaceutical products. The unit

generated SAR 15mn in sales in FY 12A (3% of revenues). Management is planning to

expand the scope of the unit by bidding for exclusive distribution rights for medical

drugs and equipment in the country, rather than its current role as a local wholesaler.

We expect the PMD unit to contribute SAR c.68mn to revenues, or 9%, by FY 16e.

(Currently 3%).

Margins

We expect operating margins to reflect mild compression in FY 13-15e (-140bps in GPM, -

90bps in EBITDA margins) as we forecast (i) a rise in staffing costs, associated with the launch

of the new building at National Hospital (H1 14e), and (ii) greater revenue contribution from

CARE’s PDM unit, which operates at far lower margins. Overall, we see a drop in blended gross

margins to 24.9% and 25.1% in FY 14e and FY 15e, respectively. We expect a degree of margin

support starting FY 16e, as we believe scale economies and rising bed utilisation rates will

begin to filter through P&L.


S e p t e m b e r 1 8 2 0 1 3



UAE – Healthcare and Pharmaceuticals

Al Noor Hospitals Group

HOLD

Healthcare and Pharmaceuticals / UAE Bloomberg code ANH LN

Market index ASX


Upside (%) -0.4



52 Week range 570.0-860.0

Market cap (GBPmn) 985

Market cap (USDmn) 1,565

Average daily traded value (GBPmn) 0.0



Revenues 324.4 391.0 437.8 451.4

EBITDA 70.6 79.7 101.4 104.5

Net income 60.3 66.7 89.3 90.7

EPS 0.52 0.57 0.76 0.78

P/E (current price) 26.0 23.5 17.5 17.2

BVPS — 1.5 2.0 2.4

P/B (current price) (539.9) 8.8 6.8 5.5


Div. yield (%) 2.0 1.7 2.3 2.3

FCF margin (%) 15.8 14.9 17.2 20.2

Net debt/EBITDA (x) 1.0 (1.3) (1.4) (1.9)

Net debt/Capital (%) 57.0 (57.7) (61.4) (68.9)

Interest cover (x) 25.3 21.9 — —

RoAA (%) 34.0 31.2 32.0 26.7

RoAE (%) 119.9 76.1 43.5 35.0

RoIC (%) 65.9 38.5 38.0 31.3

We acknowledge market leadership and growth, but stock performance suggests it is all in the price at 17.5x FY 14e P/E, 10.0x EV/EBITDA

Initiate with Hold and GBp 840/share FVE

Al Noor is a leading private healthcare provider in Abu Dhabi, with a dominant share of the market for outpatients (35%) and inpatients (39%). The company operates 3 hospitals and 10 medical centers at a total capacity of 227 beds. Going forward, the business plans to (i) add 2 new centers to its network in each year, and (ii) raise its roster of revenue-generating doctors to 445 (+30%) by the end of FY 16e. We believe that this would result in 5-yr revenue CAGR of c.5%, at the very least. To fund its current expansion, Al Noor has raised USD 150mn in new capital through an IPO in June of this year, which we think will be sufficient in meeting 45% of CAPEX rollout. We believe that the market has fully priced in growth at current multiples (17.5x/17.2x FY 14e/15e P/E). We initiate with Hold and an FVE of GBp 840. We expect modest revenue CAGR of 5% driven by (i) the 5 new medical facilities due for launch by FY 13e (Mamoura, Sanaya and Oman), (ii) the launch of 2 facilities each year thereafter, on average, (iii) the introduction of new services including obstetrics, gynaecology and paediatrics, at existing facilities and (iv) the addition of 100 revenue-generating doctors to its roster (+30%) as part of the ‘Programme Leaders’ initiative (of which 45 doctors have been employed). Growth in medical staff costs to challenge margins in the short term: We expect EBITDA margins to fall by 140bps to 20.4% in FY 13e, due to additional staff costs (100 medical doctors) during the year.

Market valuation adequately captures fundamentals: We value Al Noor at GBp 840/share, via a DCF exercise. We apply a WACC of 9.4% (10.9% Re, 0.8 Beta, 5% Rd) and a terminal growth rate of 4%. Our price target implies a P/E 14e of 17.5x, and 14.5x FY 14e EV/EBITDA- at par with local peer NMC. We believe that the market has fully priced in business fundamentals at current valuation. Al Noor trades at a 20% discount to EM peers, which we think is fair given muted growth (5% CAGR) and margin pressure.

Risks: Delays in the launch of new medical facilities. Costs related to specialised doctors could materially impact margin. For every 5% increase in medical staff costs, we estimate a 170bps compression in EBITDA margin and a 5% cut to our FVE.

GBp 840


Price Performance

88

100

112

124

136

148

Jun-13

ANH LN ASX

September 18 2013

Al Noor Hospitals Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 60


Profitability

Growth

Gearing

Valuation

0%

10%

20%

30%

2012 2013e 2014e 2015e 2016e


0%

20%

40%

60%

2012 2013e 2014e 2015e 2016e

Revenues Assets

-100%

-50%

0%

50%

100%

-4.0

-2.0

0.0

2.0

2012 2013e 2014e 2015e 2016e


0

10

20

30

2012 2013e 2014e 2015e 2016e

P/E P/E Sector


Year-end 2011 2012 2013e 2014e 2015e 2016e

Financial summary

Reported EPS 0.43 0.52 0.57 0.76 0.78 0.82

Diluted EPS — — 0.57 0.76 0.78 0.82

DPS 0.20 0.26 0.23 0.31 0.31 0.33

BVPS 0.89 (0.02) 1.52 1.98 2.45 2.94

Weighted average shares — — 58.44 116.87 116.87 116.87

Average market cap — — 1,205.74 1,215.02 1,224.30 1,233.58

Year-end 2011 2012 2013e 2014e 2015e 2016e

Valuation metrics


P/E (x) (target price) 30.6 25.8 23.3 17.4 17.1 16.3

P/BV (x) (target price) 15.1 (537.8) 8.7 6.7 5.4 4.5


EV/FCF (x) 33.5 28.6 25.1 19.5 16.0 15.9


Dividend yield (%) 1.5 2.0 1.7 2.3 2.3 2.4

Year-end 2011 2012 2013e 2014e 2015e 2016e

Growth (%)

Revenues 21.4 10.7 20.6 12.0 3.1 3.1

EBITDA 30.4 20.1 12.9 27.2 3.1 4.4

EBIT 33.3 22.2 11.5 28.4 1.7 5.3

Net income 33.2 18.7 10.6 33.9 1.7 5.3

Year-end 2011 2012 2013e 2014e 2015e 2016e

Margins (%)

EBITDA 20.1 21.8 20.4 23.2 23.2 23.5

EBIT 17.2 19.0 17.5 20.1 19.8 20.3

Net 17.3 18.6 17.0 20.4 20.1 20.5

Year-end 2011 2012 2013e 2014e 2015e 2016e

Returns (%)

RoAA 32.4 34.0 31.2 32.0 26.7 23.7

RoAE 56.6 119.9 76.1 43.5 35.0 30.3

RoIC 48.1 65.9 38.5 38.0 31.3 27.5

FCF margin 14.9 15.8 14.9 17.2 20.2 19.8

Year-end 2011 2012 2013e 2014e 2015e 2016e

Gearing (%)

Net debt/Capital (55.0) 57.0 (57.7) (61.4) (68.9) (73.2)

Net debt/Equity (56.5) (2,410.6) (57.7) (61.4) (68.9) (73.2)

Interest cover (x) 90.0 25.3 21.9 — — —

Net debt/EBITDA (x) (1.0) 1.0 (1.3) (1.4) (1.9) (2.3)

September 18 2013



Company overview

Established in 1985, Al Noor hospital is the largest private healthcare provider in Abu Dhabi in terms of the number of patients treated. It owns and operates 3 hospitals and 9 medical centers, with a 35% share of the market for outpatients and 39% for inpatients in Abu Dhabi. In 2012, it operated 227 beds and treated 1.5mn patients.


Shareholders

Sheikh Butti Al Hamed Moha 28.4%

Astro II SPV 28.3%

Alom Kassem 10.5%

Govt of Singapore Inv. Corp. 3.5%

Public 29.5%

Source: Zawya

Board of Directors

Ian Tyler Chairman

Dr. Kassem Alom Chief Executive Officer

Seamus Keating Independent Director

Sheikh Mansoor Bin Butti Al Hamed Non-Executive Director

Ahmad Nimer Non-Executive Director

Faisal Belhoul Non-Executive Director

Bill Ward Non-Executive Director

Mubarak Matar Al Hamiri Non-Executive Director



Year-end 2011 2012 2013e 2014e 2015e 2016e

Income statement (USD mn)

Sales revenue 292.9 324.4 391.0 437.8 451.4 465.3

Gross profit 117.7 135.7 158.5 188.7 191.1 196.7

SG&A (67.4) (74.2) (89.9) (100.7) (101.6) (102.4)

EBITDA 58.8 70.6 79.7 101.4 104.5 109.1


EBIT 50.3 61.5 68.6 88.0 89.5 94.3

Net interest income(expense) (0.6) (2.4) (3.1) — — —





Income tax expense — — — — — —



Net profit 50.8 60.3 66.7 89.3 90.7 95.5



Year-end 2011 2012 2013e 2014e 2015e 2016e

Balance sheet (USD mn)


Receivables 75.7 82.8 100.7 113.9 118.7 122.4

Inventories 14.3 14.2 19.1 21.2 22.8 23.6



Total assets 174.7 179.4 248.4 309.8 371.2 434.8

Payables 51.6 43.6 54.2 58.7 62.0 64.8

Interest bearing debt 2.9 125.4 — — — —



Shareholders equity 103.5 (2.9) 178.2 231.7 286.2 343.5


Total liabilities & shareholders equity 174.7 179.4 248.3 309.8 371.2 434.8

Year-end 2011 2012 2013e 2014e 2015e 2016e

Cash flow (USD mn)


Net capex (8.2) (6.8) (10.0) (20.0) (15.0) (20.0)

Free cash flow 43.8 51.2 58.3 75.2 91.3 92.3

Equity raised/(bought back) — — 141.1 — — —

Dividends paid (23.5) (30.6) (26.7) (35.7) (36.3) (38.2)

Net inc/(dec) in borrowings (2.3) (15.9) (125.4) — — —


Net cash flow 19.0 (0.3) 47.3 39.5 55.0 54.1



September 18 2013


Valuation: Fundamentals fully priced in at 17.5x FY 14e P/E and

10.0x EV/EBITDA

Price performance suggests adequate market valuation. Initiate with Hold

and GBp 840/share FVE

Exhibit 99: Al Noor trades at 20% discount to EM peer set









FLEURY SA Brazil 1,262 20.1 15.5 12.9 6.8 8.0 9.4 6% 21% 7% 17%

EM average

24.8 21.5 18.5 11.2 12.9 14.1 15% 21% 10% 14%

AL Noor UAE 1,565 23.5 17.5 17.2 12.7 10.0 9.7 NM 22% 19% 11%

Premium/(discount)

(5%) (19%) (7%) 14% (22%) (31%)


Better value elsewhere in the MENA healthcare space: We believe the market has fairly

valued Al Noor at 17.5x/17.2x FY 14e/15e EPS, as growth remains modest beyond the impact

of new staff hires, and margins remain subject to downside risks.

Exhibit 100: Lowest 5-yr EPS CAGR within our MENA healthcare coverage space


Exhibit 101: Cash flow margins sit mid-table, valuation appears appropriate at current P/OCF multiple


We value Al Noor at GBp 840/share, via a DCF exercise. We apply a WACC of 9.4% (11.0% Re,

0.80 Beta, 5% Rd) and a terminal growth rate of 4%. Our price target implies FY 14e P/E of

17.4x, and 14.5x FY 14e EV/EBITDA- at par with local peer NMC. We initiate coverage with a

Hold recommendation and GBp 840/share FVE.

DALLAH

MOUWASAT

CARE

NMC

Al Noor

12

14

16

18

20

22

24

5% 7% 9% 11% 13% 15% 17% 19% 21% 23%

5-yr EPS CAGR

P/E 14e

DALLAH

MOUWASAT

CARE

NMC Al Noor

12

13

14

15

16

17

18

19

20

5% 10% 15% 20% 25% 30%

CFO/sales

P/OCF

September 18 2013


DCF summary


Source: Company Data, Arqaam Capital Research *FCF calculation based on EBIT rather than net income

Risks Delays in the launch of new medical facilities (+40% capacity) would materially defer growth.

Specialised doctors, the cost of which remains variable, could materially impact margins: for

every 5% increase in medical staff costs, we estimate a 170bps compression in EBITDA margin

and 5% cut to our FVE.

DCF summary

USDmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e FY 18e FY 19e FY 20e

EBIT (1-τ) 69 88 90 94 95 97 100 103


EBITDA 80 101 105 109 110 112 115 118

Working Capital Changes (12) (11) (3) (2) (2) (4) (1) 0


Purchase of PPE (10) (20) (15) (20) (20) (15) (15) (15)

Free Cash Flow to Firm 58 71 86 87 88 93 99 103


PV of Visible FCFF 16 63 70 65 60 58 56 53



PV of Visible FCFF 442 Rf 4.5%

PV of Terminal Value 1,023 EMRP 8.0%




Less: Net (Debt) Funds -- Marginal tax rate 2.50%



D/C (market) 25.00%

Equity Value (USD) 1,553 WACC 9.4%


Equity Value per Share (GBp) 840

Implied multiples

EV/EBITDA 18.4 14.5 14.0 13.4 13.3 13.1 12.7 12.4

P/E 23.3 17.4 17.1 16.3 16.1 15.8 15.3 14.9

P/B 8.7 6.7 5.4 4.5 3.9 3.4 3.0 2.7

September 18 2013


Business trends

Exhibit 103: Revenues growth driven by fee-generating doctors. We expect a 5-yr revenue CAGR of 9%


Exhibit 104: 30% increase in income-generating doctors is expected in FY 13e


Exhibit 105: EBITDA forecasts


Exhibit 106: Net income forecasts


Exhibit 107: Superior RoE on low equity base


Exhibit 108: We expect working capital stability at 17% revenues


234

284 315

381 428 442 456 469 479

-

0.5

1.0

1.5

2.0

2.5

--

100

200

300

400

500

600

FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 18e

(USD mn)

Revenues Number of patients

(mn)

325 325 332 334

434 439 444 449

7 2

100 5 5 5 3

--

50

100

150

200

250

300

350

400

450

500


Revenue-generating doctors Additions

45

59

71 80

101 105 109 110 112

--%

5.0%

10.0%

15.0%

20.0%

25.0%

--

20

40

60

80

100

120


(USD mn)


38

51 60

67

89 91 96 97 98

--%

5.0%

10.0%

15.0%

20.0%

25.0%

--

20

40

60

80

100

120


(USD mn)


50% 49%

37% 39%

32% 28%

24% 27% 29%

34%

27% 29%

25% 22%

20%

--%

10%

20%

30%

40%

50%

60%


RoE RoA

12% 13%

16% 16% 17% 17%

--%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e

WC/revenues

September 18 2013


Appendix1: Market leader among private sector hospitals

Established in 1985, Al Noor hospital has emerged as the largest healthcare provider in the

private healthcare market of the Emirate of Abu Dhabi in terms of the number of patients

treated, the number of operating beds owned, and the number of doctors employed. In 2011,

the business was ranked 1st

among private healthcare providers for both inpatients (39%) and

outpatients (35%) via its 3 hospitals, 10 medical centers, and 461 physicians and medical/non-

medical staff.

Existing facilities The company’s facilities are located in the dense population districts of Abu Dhabi:

Central region

In the Central Region, Al Noor operates Airport Road Hospital and Khalifa Hospital, which are

supported by two medical centers. Airport Road Hospital caters to Abu Dhabi city by

operating 94 beds and offering a full range of specialty services. It treated 395k outpatients

and 16k inpatients, during 2012. The company is planning to establish the hospital as a care

center for cardiac, plastic, and paediatric treatments. Khalifa Hospital, established in 1986 and

relocated to the central region by 1999, operated 81 beds and treated 538k outpatients and

14k inpatients. As per the HAAD directive which prevents hospitals from being located in

mixed-use facilities, Al Noor will lease the non-residential portion of the building to raise the

bed capacity of the hospital. Mussafah Clinics 1 & 2 offer basic and specialised services with 25

physicians and 15 nurses employed, and have admitted 124k outpatients in 2012.

Exhibit 109: Al Noor is largely present in the Central region through 4 health facilities

Name of Facility Type Date of establishment No. of beds

Airport Road Hospital Hospital 2008 94

Khalifa Hospital Hospital 1986 81

Mussafah Clinic 1&2 Medical center 2002 & 2011 NA


Eastern region

Al Ain Hospital, the main facility in the eastern region, established in 2006 and supported by 3

clinics, operates 50 beds and offers a full range of medical services. Targeting UAE nationals,

members of the Thiqa plan, and lower income expats (basic plan), Al Ain hospital and clinic

treated 322k outpatients and 7k inpatients during 2012.

Exhibit 110: Health facilities in the Eastern region


Al Ain Hospital Hospital 2005 50

Al Ain clinic Medical center 2009 NA

AL Yahar clinic Medical center 2012 NA


September 18 2013


Western region

Constituting merely 6% of the Abu Dhabi population base, the western region is characterized

by a low population density (150k or 6% of AD population) and a household size of 4.1. Al Noor

has established 3 standalone medical centers in the region, acting as inpatient referral centers

for the 3 hospitals in Abu Dhabi. The centers offer ancillary and diagnostic services including

radiology and laboratory.

Exhibit 111: Presence extends to the Western region through 3 facilities


Al Mirfa clinic Medical center 2011 50

Beda Zayed clinic 1 &2 Medical center 2003 NA


Expansion plans Khalifa Hospital: Since this facility is a mixed use building that includes residential segments, Al

Noor is planning to lease this segment to be in compliance with the HAAD regulations.

Additionally, the company is considering a new purpose-built facility located near Khalifa

hospital for leasing purposes.

Inorganic growth: Al Noor intends to explore strategic investments in Abu Dhabi by acquiring

specialised hospitals and medical centers, such as oncology and long-term care facilities. Also,

it plans to expand within the UAE to benefit from the implementation of the mandatory

healthcare coverage.

Medical centers: Al Noor already added 3 medical facilities earlier this year and intends to add

two more later this year and each year until FY 16e. It also plans to raise the average number

of its staff by 60 physicians by FY 13e (29 added so far) as part of its current recruitment phase

of c. 100 physicians.

September 18 2013


Important Notice 1. Author, regulator and responsibility

Arqaam Capital Limited (“Arqaam”) is incorporated in the Dubai International Financial Center (“DIFC”) and is authorised and regulated by the Dubai Financial Services Authority ("DFSA") to carry on financial services in

and from the DIFC. Arqaam publishes and distributes (i.e. issues) all research.

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2. Purpose This document is provided for informational purposes only. Nothing contained in this document constitutes investment, legal, tax or other advice or guidance and should be disregarded when considering or making

investment decisions. In preparing this document, Arqaam did not take into account the investment objectives, financial situation and particular needs of any particular person. Accordingly, before acting on this

document, investors should independently evaluate the investments and strategies referred to herein and make their own determination of whether it is appropriate in light of their own financial circumstances and

objectives.

3. Rating system Arqaam investment research is based on the analysis of regional and country economics, industries and company fundamentals. Arqaam company research reflects a long-term (12-month) fair value target for a

company or stock. The ratings bands are:

Buy Total return > 20%

Hold -10% < Total return < 20%

Sell Total return < -10%

In certain circumstances, ratings may differ from those implied by a fair value target using the criteria above. Arqaam policy is to maintain up-to-date fair value targets on the companies under its coverage, reflecting

any material changes to the analyst’s outlook on a company. Share price volatility may cause a stock to move outside the rating range implied by Arqaam’s fair value target. Analysts may not necessarily change their

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6. Risk warnings 6.1 Any prices, valuations or forecasts are indicative and are not intended to predict actual results, which may differ substantially from those reflected.

6.2 The value of an investment may go up as well as down. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including, without

limitation, foreseeable or unforeseeable changes in interest rates, foreign exchange rates, default rates, prepayment rates, political or financial conditions, etc.).

6.3 Past performance is not indicative of future results. Any opinions, estimates, valuations or projections (target prices and ratings in particular) are inherently imprecise and a matter of judgement. They are

statements of opinion and not of fact, based on current expectations, estimates and projections, and rely on beliefs and assumptions. Actual outcomes and returns may differ materially from what is expressed or

forecasted. There are no guarantees of future performance.

6.4 Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

6.5 This document does not propose to identify or to suggest all of the risks (direct or indirect) which may be associated with the investments and strategies referred to herein.

7. Conflict 7.1 Arqaam and its affiliates provide full investment banking services, and they and their directors, officers and employees, may take positions which conflict with the views expressed in this document. Our salespeople,

traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in

this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this

document.

7.2 Arqaam may have or seek investment banking or other business relationships for which it will receive compensation from the companies that are the subject of this document.

7.3 Facts and views presented in this document have not been reviewed by, and may not reflect information known to, professionals in other Arqaam business areas, including investment banking personnel.

7.4 Emirates NBD PJSC owns 8.32% of Arqaam and Commercial Bank International PJSC owns 6.35%.

8. No warranty Arqaam makes no representations or warranties and, to the fullest extent permitted by applicable law, we hereby expressly disclaim any and all express, implied and statutory representations and warranties of any kind,

including, without limitation, any warranty as to accuracy, timeliness, completeness, merchantability, fitness for a particular purpose and/or non-infringement.

9. No liability Arqaam will accept no liability in any event including (without limitation) negligence for any damages or loss of any kind, including (without limitation) direct, indirect, incidental, special or consequential damages,

expenses or losses arising out of, or in connection with your use or inability to use this document, or in connection with any error, omission, defect, computer virus or system failure, or loss of any profit, goodwill or

reputation, even if expressly advised of the possibility of such loss or damages, arising out of or in connection with your use of this document. We do not exclude our duties or liabilities under binding applicable law.

10. Copyright and Confidentiality The entire content of this document is subject to copyright with all rights reserved and the information is private and confidential for your own personal use only. This document and the information contained herein

may not be reproduced, distributed or transmitted to any other person or incorporated in any way into another document or other material without our prior written consent.

11. Governing law English law governs this document and these disclaimers and any dispute in relation thereto shall be exclusively referred to the English Courts.

http://www.arqaamcapital.com/english/system/footer/terms-of-use.aspx

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