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Al Noor Hospitals Group Plc – 07th April 2014


Company Overview:

Al Noor Hospitals was established in 1985 as a private healthcare provider in Abu Dhabi. In this time, the company has grown to become one of the leading providers of private health care services in the UAE.

In 2013 the group listed on the London Stock Exchange and was admitted to trading on the FTSE 250. As of March 2014, the company operated three full service hospitals and a number of medical centres across Abu Dhabi, servicing nearly 50,000 inpatients and a total of 1.6 million outpatients.

Core areas of focus for the group include: Cardiovascular treatment and surgery, Bariatric (weight loss) treatment and surgery, Cancer treatment and surgery, Neurosurgery – Urology – Orthopaedic – Paediatric – Ophthalmology (Eye Surgery).

Index FTSE 250 Ticker ANH.L Latest Close 1078.00
52 Week High 1308.13 52 Week Low 575.00 P/E 8.09
Dividend Yield % 3.79 Dividend Cover 3.06 CEO: Dr Kassem Alom
CFO/Group FD: Mr Pramod Balakrishnan

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Changing Demographics that Can Drive Portfolio Returns; Abu Dhabi Accrues More than Just Wealth

While shifting demographics are often the cause of headaches for both organisations and investors alike, Al Noor Hospitals Group (ANH) has found support for its long term growth prospects in the changing demographics of the United Arab Emirates.

This is as growing wealth and expansion have led the populations of Abu Dhabi and Dubai to accrue, among other things, some of the highest levels of obesity, diabetes and cardiac disease in the developed world. Health Authority of Abu Dhabi (HAAD) figures show that 30% of the population are classed as clinically obese and just under 20% of the population suffer from diabetes.

HAAD also believes that there is a direct correlation between the aforementioned figures and the percentages of all deaths within Abu Dhabi which are attributable to cardiovascular disease (29%) and cancer (14%). Although UAE governments provide generously for the indigenous population across a broad spectrum of areas, the scale of the health problems experienced by various populations has led to a gradual shift toward mandatory private health care insurance across many of the Emirates. These trends are supportive of expectations for sustained increases to demand for better health care services, education and spending.

In addition to this, Abu Dhabi has one of the youngest populations in the developed world. Similar to other Emirates, the number of retired individuals  equates to less than 6% of the overall population at present. The fact that this will change over time indicates that the UAE health care arena has the potential to be a big growth area for both businesses within the field, as well as investors.

This belief is reinforced by a brief look at the numbers in terms of health care spending as a percentage of both individual, as well as national income, in the UAE. In Abu Dhabi, the total public and private spend on health care per capita (per head) is among the lowest in the developed world, while productivity per capita (GDP per head) is among the highest.

This is a gap which management at Al Noor Hospitals Group expects to close over the coming years, providing opportunity for a continuation of the strong growth which the group has experienced since the 1980s.

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No.1 Private Health Care Provider in Abu Dhabi Gunning for No.1 Spot in UAE

Al Noor Hospitals has become the number one provider of private health care services in Abu Dhabi through maintaining high standards, acquiring and retaining highly skilled staff and positioning its hospitals and treatment centres close to their customers.

This normally involves targeting “historically underserved” residential areas for the development of sites, although the group also aims to be the first to market in newly populated communities. This has so far proved to be a successful strategy.

The group has previously announced intentions to build up the range of specialist treatments available within its portfolio and already uses its residential presence as a means of referring otherwise home-bound patients on for specialist care elsewhere in Abu Dhabi.

As part of the group’s strategic expansion at home, it added 120 revenue generating doctors to the payroll over 2013 and completed the acquisition of Gulf International Cancer Centre for $21.8 million in February 2014, the only private cancer treatment centre in Abu Dhabi.

In addition to further developing ANH’s position within the Abu Dhabi health care space, management also plan to expand geographically, by acquisition, into other Emirates. Although this could see the group targeting other organisations across the Gulf, Dubai is believed to be the first destination on the list.

Management expect this type of expansion to compliment the organic growth of the existing business and continue to be an additional driver of revenue and profits growth going forward, helping to cement ANH’s position as a dominant force in the UAE health care space.

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Company Performance, Competitive Advantage and Competition

While Al Noor Hospitals Group has grown rapidly over the past years, they are not the only private healthcare provider in the UAE. The group reported a number of new entrants into the Abu Dhabi health care space during 2013 while the company’s nearest competitor in terms of size, NMC Health (NMC.L), continues to grow at a healthy pace in tandem with Al Noor.

When compared with each other, the smaller Al Noor Hospitals Group appears the leader of the pack from an investment perspective. The company has considerably less debt on its books (£12 million) and an un-drawn line of credit. The lower level of gearing compared to NMC is positive for the group’s ability to raise further finance on more favourable terms in the future should it become necessary in order to grow.

Despite being the smaller company by asset value and revenues, on an earnings per share basis the cash returns that ANH generates for shareholders are 60% greater in nominal terms than those of a company that is double the size (NMC Health).

For 2013, the ANH reported underlying basic EPS of $65.3 cents which compares favourably against the $0.39 cents reported on the same metric by NMC Health.

The group’s predominant focus on vital services that are subject to increasing demand serves to reduce the risk that the group faces from competition, as it operates in an under-served market where its brand and reputation are established. This is, again, in contrast to NMC Health which draws a significant portion of revenues from a medical supplies business which is vulnerable to competition from cheaper overseas suppliers.

In addition to this, the group is still growing at an impressive pace, with underlying EBITDA (earnings before interest, taxes, depreciation and amortisation) increasing by 16.9% over 2013.

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Valuation Places Shares at a Premium to the Market While Dividend Excludes Income Investors

The above dynamics, along with ANH’s scale as a business, provide the group with a degree of insulation against competitive headwinds. On a price to earnings basis, ANH currently trades on a multiple of 29.7 X earnings which represents a significant premium to the 23.32 X multiple of NMC Health.

This indicates that the market has high expectations of Al Noor Hospitals and the question that remains is whether or not the group can continue to deliver for investors. The group is also due to pay its first dividend as a listed company on 11 April 2014, with a record date of March 14 2014. The total pence per share payment due is 9 pence which equates to a meagre yield of 0.8%, covered 4.4 X over by earnings.

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Risks

The primary risks faced by Al Noor Hospitals are from the growing number of new entrants into the Abu Dhabi healthcare market. These newcomers pose a risk to Al Noor, not so much because of their ability to lure away the group’s clientele, but because they create increased competition for skilled medical staff. This, if it continues unabated, could lead to further increases to the cost of retaining staff and, as a result, place pressure upon margins.

Although the threat from competition for both clients and resources cannot be ignored, management stressed when delivering the group’s full year results at the close of Q1 that the group remains well positioned to address these headwinds.

ANH continues to maintain one of the most competitive pay and benefit systems in the market for key staff while it also continues to invest heavily into selectively expanding the portfolio of treatments which it offers to clients.

On the slightly different note, but the same subject, the board at ANH also view the growing number of providers in the market as validation that they are operating within a geographical area which continues to offer attractive growth opportunities. Opportunities which exist due to a notable gap between the available supply of specialised services and the market demand for them.

For these reasons, the board at ANH continue to see the likely impact of identified risks upon the businesses performance over the coming period as minimal.

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Summary

While ANH shares have performed well since listing on the London Stock Exchange in June 2013, and despite the fact that much of the growth seen over recent years is now priced into the stock, further opportunities still lay ahead for Al Noor Hospitals.

Situated within a wealthy state which holds one of the world’s highest GDP per capita ratios, and where private health insurance is mandatory, there remains scope for ANH to expand both the range of treatments on offer as well as its geographical presence into other Emirates.

With these opportunities for growth within a resilient economy, and close to nil debt attached to the balance sheet, there are no immediately clear barriers to success for Al Noor Hospitals Group. With this in mind, and given management’s record to date, the premium valuation attached to the stock is not currently of concern. On the contrary, we maintain an optimistic outlook over the future prospects for the group.

In the short term however, shares trading at 1091.00 do appear vulnerable to a further correction given the pace at which they have appreciated over recent months. Onwards from here we expect to see the stock stable, and attractive, at or around the 990.00 pence level.

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