MENA Healthcare No Better Time to Be Overweight

MENA Healthcare No Better Time to be Overweight

MENA Healthcare Sector Report | 18 September, 2013 Sector Coverage

September 18 2 0 1 3

Mohammad Kamal [email protected] +9714 507 1743

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

MENA Healthcare Summary of recommendations No better time to be overweight Bloomberg code MOUWASAT AB Lifestyle-related diseases are highly prevalent in MENA, and particularly in Company name Al Mouwasat Medical Services Company KSA and the UAE: sedentary lifestyles and poor dietary habits linked to Price target SAR 103 diabetes, cardiovascular diseases, and cancer have rendered KSA and UAE Rating 30% upside, Buy 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 Bloomberg code DALLAH AB rate, on par with the US (36%) and ahead of MENA (<30%). The UAE faces a Company name Dallah Healthcare Holding Company similar situation, with 36% of the population classified as obese. Perhaps Price target SAR 88 most striking is the incidence of diabetes among young (<39) residents in Rating 40% upside, Buy

KSA, which stands at >2x the US rate at 32% of the overall diabetic population (14% US). Bloomberg code NMC LN Company name NMC Health Chronic underinvestment and over-expenditure: The KSA bed/1,000 ratio Price target GBp 440 of 2.2 (1.7 beds provided by the government, 0.5 by the private sector) is Rating 40% upside, Buy 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 Bloomberg code CARE AB 2011. National spending on healthcare in KSA and UAE has been between Company name National Medical Care Company 4.0% and 2.5% of GDP over the past 5 years, roughly in-line with the MENA Price target SAR 48 average, but low by developed market standards (18% in the US, 11% in Rating 12% downside, Hold France and Germany, 8% in the UK). Conversely, the expenditure on medical treatments abroad for KSA and UAE nationals has cost both Bloomberg code ANH LN countries an average of USD 5bn in the past 10 years, as a consequence of Company name Al Noor Hospitals Group insufficient domestic healthcare infrastructure and a shortage of qualified Price target GBp 840 specialised doctors. Rating 0% upside, Hold

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.

September 18 2013 MENA – Healthcare and Pharmaceuticals

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 MENA – Healthcare and Pharmaceuticals

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 MENA – Healthcare and Pharmaceuticals

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 18% 20% 40% 33% 9% revenues Govt entities, % of revenues 60% 3% 40% 20% 70%

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

Receivables days 92 99 134 93 130 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 MENA – Healthcare and Pharmaceuticals

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 EBITDA Net Rev CAGR EPS CAGR RoE Div Yield P/E EV/EBITDA margin margin 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 MENA – Healthcare and Pharmaceuticals

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 MENA – Healthcare and Pharmaceuticals

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 Exhibit 5: 30% of KSA population is <15 years of age, while 5% growth is > 60

Population breakdown by age (FY 12) 14% 5-year population growth 100% 5% 5% 1% 14% 8% 10% 12% 8% 14% 9% 11% 17% 16% 21% 17% 21% 12% Qatar 80% 10% 48% 52% 65% 49% 60% 65% 55% 64% Bahrain 59% 72% 52% 55% 81% 85% 8% 62% 55% 56% 40% 6%

Oman KSA 20% 43% 40% 4% 31% 36% 31% 30% UAE Iraq 27% 20% 23% 27% 24% 27% 27% 23% Jordan 14% 14% 2% Kuwait Egypt Lebanon 0%

Libya Iran Algeria Morocco

KSA

Iraq Iran

--% Tunisia UAE

Libya

Egypt

Qatar

Oman

Sudan

Jordan

Kuwait

Algeria Tunisia

(6%) (4%) (2%) --% 2% 4% 6% 8% Bahrain Lebanon (2%) Sudan Morocco 5-year GDP/capita growth (4%) < 15 years 15-60 years > 60 years

Source: IMF 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.

September 18 2013 MENA – Healthcare and Pharmaceuticals

(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 Exhibit 7: 12% of the KSA population is diabetic, well ahead of KSA population base by FY 20e MENA (9%) and the US (10%)

KSA population breakdown by age Diabetic incidence as a % of total population 120% 18% 16% 100% 16% 11% 12% 13% 17% 16% 18% 19% 21% 14% 80% 12% 12% 34% 33% 12% 34% 10% 60% 36% 39% 38% 10% 9% 38% 34% 10% 9% 40% 8% 51% 51% 48% 6% 5% 20% 43% 41% 39% 37% 37% 4% 0% 2% FY 90A FY 95A FY 00A FY 05A FY 10A FY 12A FY 15e FY 20e 0% 0-19 20-39 40-59 60-75+ UAE KSA Lebanon Kuwait Egypt Jordan MENA US

Source: BMI Source: WHO

Exhibit 8: 32% of diabetic patients are <39 years of age Exhibit 9: The KSA obesity rate of 35% is among the highest globally (MENA 30%, global 11%)

Diabetes patients age structure Obesity rates

100% 5% 50% 13% 45% 90% 16% 45% 28% 31% 80% 42% 42% 40% 36% 36% 35% 35% 70% 34% 55% 35% 60% 52% 30% 51% 30% 28% 50% 49% 50% 25% 40% 47% 44% 30% 20% 20% 40% 15% 11% 35% 32% 10% 23% 19% 10% 11% 14% 0% 5% Egypt Jordan Kuwait Lebanon KSA UAE USA 0% 20-39 40-59 60-79 Kuwait UAE US KSA Egypt Jordan Lebanon MENA Global

Source: WHO Source: WHO

September 18 2013 MENA – Healthcare and Pharmaceuticals

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 Exhibit 11: KSA healthcare per capita expenditure is well-below markets global levels (-c.30%)

Hospital beds per 1,000 Healthcare expenditure per capita FY 11A (USD) 9 8.3 4,000 3,537 8 3,500 6.6 7 3,000 6 2,500 2,373 5 2,000 1,640 4 3.0 3.0 1,500 3 1,030 2.2 2.1 1.9 1,000 758 2 709 500 209 1 99 0 - US Europe UAE Global KSA Western Pacific Eastern Africa Germany France US UK KSA MENA UAE Mediterranean

Source: World Bank Source: BMI, OECD Health data

September 18 2013 MENA – Healthcare and Pharmaceuticals

(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 MENA – Healthcare and Pharmaceuticals

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 Exhibit 13: Government funding of private health projects: 143 risen at a CAGR of c.30% since FY 07A, driven by loans, SAR 2.5bn issued since 2007 regulation stipulating mandatory health cover

Medical Insurance Premiums in KSA (SAR bn) (SAR mn) 3,000 160 2,536 12.0 11.2 2,536 140 2,500 2,358 9.7 2,195 120 10.0 1,962 8.7 2,000 100 8.0 7.3 1,500 80

6.0 60 4.8 1,000 40 4.0 3.1 500 20

2.0 - - FY 07A FY 08A FY 09A FY 10A FY 11A 0.0 FY 07A FY 08A FY 09A FY 10A FY 11A FY 12A Soft loans for health projects Number of loans

Source: SAMA 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 Exhibit 15: Public healthcare spending vs. private

(SAR bn) 120% 70.0 4.5% 61.0 4.0% 100% 60.0 52.4 3.5% 33% 34% 34% 31% 30% 50.0 46.6 80% 40.4 3.0% 40.0 34.4 2.5% 60% 2.0% 30.0 40% 1.5% 67% 66% 66% 69% 70% 20.0 1.0% 20% 10.0 0.5% 0% 0.0 0.0% FY 08A FY 09A FY 10A FY 11A FY 12A FY 08A FY 09A FY 10A FY 11A FY 12A Healthcare spending As a percentage of GDP Public spending Private spending

Source: SAMA, IMF Source: SAMA

September 18 2013 MENA – Healthcare and Pharmaceuticals

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

Hospitals by sector Beds by sector ('000) 500 70 450 60 400 14 136 13 350 50 12 125 127 13 11 11 127 123 123 300 12 39 40 11 11 39 39 10 11 11 250 39 39 39 200 30 150 20 38 244 249 261 33 34 100 218 225 231 31 31 32 10 50 0 - FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A

Ministry of health hospitals Other Gov. Hospitals Private hospitals Ministry of health hospitals Other Gov. Hospitals Private hospitals

Source: CARE and MoH Source: CARE and MoH

September 18 2013 MENA – Healthcare and Pharmaceuticals

Key private healthcare groups in KSA

Exhibit 18: KSA outpatient visits by sector Exhibit 19: KSA inpatient visits by sector

FY 10A FY 10A Public Public inpatient outpatient visits, 9% visits, 14%

Private Private inpatient visits, outpatient 91% visits, 86%

Source: CARE prospectus Arqaam Capital Research Source: CARE prospectus Arqaam Capital Research

Exhibit 20: Top 10 private hospitals in Riyadh No. of Market Hospitals Specialty beds share Dr. Sulaiman Al-Habib Medical Pediatrics, obstetrics & gynecology, IVF, orthopaedics, ophthalmology, dermatology, plastic 18% Group 655 surgery

National Medical Care Company 12% Pediatrics, obstetrics & gynecology, orthopaedics, ophthalmology, dermatology 420

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

Specialized Medical Center Hospital 11% Ophthalmology, pediatrics, cardiology, dermatology, dentistry, and internal medicine 400

Saudi German Hospital Riyadh 8% Cardiology, neurology & neurosurgery, opthalmology, orthopaedics and traumatology 300

Al Hammadi Hospital 8% Obstetrics & gynecology, cardiology, orthopaedics, dermatology, pediatrics 275

Kingdom Hospital Consulting Clinics 3% Surgical & medical obesity, anesthesiology, dentistry 125 Dr Abdul Rahman Al-Mishari 3% Nursery & neonatal intensive care, obstetrics & gynecology, pediatrics Hospital 122

Al-Mouwasat Hospital 3% Pediatrics, obstetrics & gynecology, IVF, orthopaedics, ophthalmology, cardiology 120

Obeid Specialized Hospital 3% Pediatrics, ophthalmology, cardiology, dermatology, gastroenterology, dentistry 120

Others 19% 708

Total 3,645 100%

Source: Company Data, Arqaam Capital Research

September 18 2013 MENA – Healthcare and Pharmaceuticals

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

mn UAE population breakdown by age group 7.0 6.4 4.0% 6.0 6.2 >60, 1% 5.7 5.9 6.0 5.4 5.5 5.1 5.2 3.5% 5.0 0-14, 14%

4.0 3.0% 3.0

2.0 2.5% 1.0 15-60, 85%

0.0 2.0% FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

UAE population Population growth (RHS)

Source: World Bank, BMI Source: BMI

September 18 2013 MENA – Healthcare and Pharmaceuticals

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

(USD bn) Healthcare expenditure per capita FY 11A (USD) 25.0 3.0% 22.0 4,000 20.4 3,537 2.5% 20.0 18.7 3,500 17.2 15.7 3,000 14.3 2.0% 15.0 12.8 2,373 11.7 2,500 10.2 1.5% 10.0 2,000 1,640 1.0% 1,500 5.0 0.5% 1,030 1,000 758 709 0.0 0.0% 500 209 FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e 99 - US Europe UAE Global KSA Western Pacific Eastern Africa Government spending on healthcare as a % of GDP Mediterranean

Source: BMI, IMF Source: OECD Health data

September 18 2013 MENA – Healthcare and Pharmaceuticals

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 Exhibit 26: 1.9 beds/1,000 residents: particularly low vs. global average, but ahead of KSA developed markets and MENA average

Physicians per 1,000 Hospital beds per 1,000 5 9 8.3 4.5 4.3 8 4 3.7 3.4 7 6.6 3.5 6 3 2.8 2.4 5 2.5 1.9 2 1.7 4 3.0 3.0 3 1.5 2.2 0.9 2.1 1.9 1 2

0.5 1

0 0 Russia Germany France UK US UAE Turkey KSA Germany France US UK KSA MENA UAE

Source: World Bank 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.

September 18 2013 MENA – Healthcare and Pharmaceuticals

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 Exhibit 28: …similarly, outpatient claims grew 8x result of mandatory health cover…

Inpatient Claims in AD ('000) Outpatient Claims in AD (mn)

180 166 14 12.9 160 12 140 CAGR 58% CAGR 98% 10 120 100 8

80 6 60 42 4 40 1.6 2 20 - 0 FY 07A FY 10A FY 07A FY 10A

Source: HAAD Source: HAAD

The precedent: the Abu Dhabi health insurance system

Exhibit 29: Abu Dhabi insurance schemes by enrolment.. Exhibit 30: …and by claim value

(FY 11A) (FY 11A)

Thiqa, 16% Basic, 16%

Basic, 47% Thiqa, 48%

Enhanced, 37% Enhanced, 36%

Source: HAAD 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.

September 18 2013 MENA – Healthcare and Pharmaceuticals

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 Exhibit 32: …while claims expanded by 4x past 4 years…

UAE written premiums (AED bn) UAE claims paid (AED bn)

6.0 5.6 5.0 4.4 5.0 4.5 5.0 4.0 3.6 4.1 3.5 4.0 3.0 3.1 2.5 3.0 2.5 2.1 2.0 1.6 2.0 1.5 1.1 1.1 1.0 1.0 0.5 0.5 - - FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A

Source: National Bureau of statistics Source: National Bureau of statistics

September 18 2013 MENA – Healthcare and Pharmaceuticals

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 MENA – Healthcare and Pharmaceuticals

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 Exhibit 35: Abu Dhabi outpatients by sector

FY 11A FY 11A

Private, 35% Public, 40%

Private, 60% Public, 65%

Source: HAAD Source: HAAD Exhibit 36: Abu Dhabi hospitals by sector Exhibit 37: Dubai hospitals by sector

FY 11A FY 11A

Public hospitals, 21% Private Public hospitals, 49% hospitals, 51%

Private hospitals, 79%

Source: HAAD, company data Source: DHA, company data Exhibit 38: Abu Dhabi hospital beds by sector Exhibit 39: Dubai hospital beds by sector

FY 11A FY 11A

Public hospital Private hospital beds, 1,765 , beds, 1,238 , 37% 38% Private hospital Public hospital beds, 2,984 , beds, 2,006 , 63% 62%

Source: HAAD, company data Source: DHA, company data

Initiation Report

September 18 2013

Mohammad Kamal [email protected] +9714 507 1743

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

Saudi Arabia – Healthcare and BUY SAR 103 Pharmaceuticals Healthcare and Pharmaceuticals / Saudi Arabia Al Mouwasat Medical Services Co. Core growth drivers are in an even blend of volume (bed capacity Bloomberg code MOUWASAT AB +85%) and pricing elements (re-pricing of insurance contracts +20%) Market index SASEIDX Cheap in peer context: 23%+ RoE at 15.2x FY 14e P/E, 15% discount Price target (local) 103 Upside (%) 30.9 to peers. Initiate with Buy, SAR 103 FVE

Mouwasat Medical Services is a broad play on the Saudi healthcare Market data 12/09/2013 Last closing price 79.00 sector. We believe Mouwasat is trading at an unwarranted 15% discount 52 Week range 48.2-85.0 to regional peer set multiple of 17.6x/15.9x, given its (i) superior returns Market cap (SARmn) 3,950 Market cap (USDmn) 1,053 (23% FY 13e RoE vs. 15% for local peers, (ii) EPS outlook at 15% CAGR, and Average daily traded value (SARmn) 12.6 (iii) unique growth catalysts. We value Mouwasat at SAR 103/share, Average daily traded value (USDmn) 3.4 implying 30% in upside from current market price, using DCF. We initiate

with a Buy rating and a FVE of SAR 103. Year-end (local mn) 2012 2013e 2014e 2015e Revenues 796.5 943.7 1,114.6 1,199.1 The business enjoys 3 key growth catalysts that in our view are currently EBITDA 224.7 280.6 337.7 345.9 Net income 171.6 217.7 260.5 279.1 foregone in current share price: (i) Bed capacity expansion to 1,089 beds EPS 3.43 4.35 5.21 5.58 (c. 85% growth) by FY 18e, translating into an 5-yr revenue CAGR of 13%, P/E (current price) 23.0 18.1 15.2 14.2 BVPS 16.3 19.3 22.7 26.2 (ii) A departure from its core market towards the urban center of Riyadh, P/B (current price) 4.9 4.1 3.5 3.0 through the roll out of an additional 175 beds (23% of total bed capacity) EV/EBITDA (current price) 18.3 14.7 12.2 11.9 by the end of FY 13e. Both volume elements above should produce a 75% Div. yield (%) 1.9 1.7 2.2 2.6 FCF margin (%) (1.2) 2.7 2.1 9.4 growth in revenues over the next 5 years. (iii) Agreements with insurers Net debt/EBITDA (x) 0.4 0.4 0.6 0.5 regarding the collection of patient claims, which constitute 40% of Net debt/Capital (%) 7.6 10.8 13.7 11.7 Interest cover (x) 164.5 95.8 76.3 58.5 revenues, have recently been re-priced upwards by an average of 20%. RoAA (%) 15.6 17.2 18.1 16.8 This is a negotiated process that adjusts the collection ratios applied on RoAE (%) 22.5 24.5 24.8 22.8 inpatient and outpatient services administered to patients that enjoy RoIC (%) 18.2 21.7 21.4 20.1 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 Price Performance derive from corporate clients (Aramco, GOSI and other large corporates). MOUWASAT AB SASEIDX The company’s broad presence in the eastern province has resulted in a 171 disproportionately large share of the healthcare industry in the region, at 153 135 28% (inpatients) and 16% (outpatients). 117 99 81 Cheap in peer context: Mouwasat currently trades at 15.2x FY 14e EPS vs. Sep-12 Dec-12 Mar-13 Jun-13 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- © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. line with sector multiples, at the very least. Risks: Delays, Saudisation See Important Notice. laws.

September 18 2013

Al Mouwasat Medical Services Co. Abacus Arqaam Capital Fundamental Data Year-end 2011 2012 2013e 2014e 2015e 2016e Financial summary Profitability Reported EPS 2.96 3.43 4.35 5.21 5.58 6.08 40% 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 20% BVPS 14.22 16.27 19.25 22.72 26.22 30.07

0% Weighted average shares 50.00 50.00 50.00 50.00 50.00 50.00 2012 2013e 2014e 2015e 2016e Average market cap 2,239.00 2,617.50 3,865.00 3,865.00 3,865.00 3,865.00

EBITDA Margin Net Margin Year-end 2011 2012 2013e 2014e 2015e 2016e Valuation metrics

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

30% 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 20% EV/EBITDA (x) (target price) 25.8 23.6 18.9 15.7 15.3 13.5 10% EV/FCF (x) 41.5 (534.3) 207.3 221.6 46.8 24.3 0% EV/Invested capital (x) 6.4 5.4 5.0 4.1 3.6 3.2 2012 2013e 2014e 2015e 2016e Dividend yield (%) 1.3 1.9 1.7 2.2 2.6 2.8 Revenues Assets

Year-end 2011 2012 2013e 2014e 2015e 2016e Growth (%)

Gearing Revenues 15.5 17.4 18.5 18.1 7.6 15.1

0.6 15% EBITDA 16.7 9.4 24.9 20.3 2.4 13.5

0.4 10% 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 0.2 5%

0.0 0% 2012 2013e 2014e 2015e 2016e Year-end 2011 2012 2013e 2014e 2015e 2016e Margins (%) Net Debt/Capital Net Debt/EBITDA

EBITDA 30.3 28.2 29.7 30.3 28.8 28.4 Valuation 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 30

20 Year-end 2011 2012 2013e 2014e 2015e 2016e 10 Returns (%) 0 2012 2013e 2014e 2015e 2016e 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 P/E P/E Sector 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

Arqaam Capital Fundamental Data Al Mouwasat Medical Services Co. Abacus 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 Company overview 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) Established in 1974, Mouwasat Hospital owns and EBITDA 205.5 224.7 280.6 337.7 345.9 392.5 operates 4 hospitals and 2 dispensaries in the Depreciation & Amortisation (36.2) (38.7) (41.2) (51.6) (38.8) (58.3) eastern province of KSA with a total bed capacity of 594 beds and 227 clinics as of FY 12A. The EBIT 169.3 186.0 239.4 286.1 307.1 334.1 company is also in the process of launching a new Net interest income(expense) (2.1) (1.1) (2.5) (3.8) (5.3) (5.5) hospital in Riyadh at a total bed capacity of 175 Associates/affiliates — — — — — — beds. SABIC and Saudi Aramco are the company’s Exceptionals/extraordinaries — — — — — — two largest clients, generating 40% of its Other pre-tax income/(expense) 8.5 8.7 8.7 8.7 8.7 8.7 healthcare revenues. 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) Ownership and management Other post-tax income/(expense) — — — — — — Net profit 148.1 171.6 217.7 260.5 279.1 303.9 Shareholders Arqaam adjustments (including dilution) — — — — — — Mohammed Sultan Hammad Al Subaie 17.5% Arqaam Net profit 148.1 171.6 217.7 260.5 279.1 303.9 Nasser Sultan Fahad Al Subaie 17.5% Suleiman Mohammed Suleiman Al Saleem 17.5% Year-end 2011 2012 2013e 2014e 2015e 2016e Public 47.5% Balance sheet (SAR mn) Source: Zawya 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 Board of Directors Inventories 58.6 62.6 72.0 84.5 91.1 107.7 Mr. Mohammed Sultan Hammad Al Subaie Chairman Tangible fixed assets 525.6 688.0 852.9 1,059.3 1,214.4 1,272.8 Mr. Nasser Sultan Fahad Al Subaie Director Other assets including goodwill 24.5 75.1 75.1 75.1 75.1 75.1 Mr. Mohammed Bin Suleiman Al Saleem Director Mr. Khaled Bin Suleiman Al Saleem Director Total assets 984.8 1,219.2 1,318.6 1,565.4 1,750.9 1,982.6 Mr. Ibrahim Hamad Al Babtain Director Payables 108.3 115.2 132.5 155.6 167.5 198.1 Mr. David Anthony Price Director Interest bearing debt 138.5 259.1 187.6 232.3 224.5 225.9 Mr. Abdulaziz Saad Al Mangoor Director Other liabilities 27.2 31.2 35.9 41.5 47.9 55.3 Source: Company data 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)

30.0% 26.7% 27.5% 25.8% 24.1% 25.0% 22.9%

19.2% Private hospital 20.0% beds, 23% 16.5% 14.4% 14.5% 14.9% 15.0%

10.0% Public hospital beds, 77% 5.0%

0.0% FY 08A FY 09A FY 10A FY 11A FY 12A

East region Madinah

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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.

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

Source: Company Data, Arqaam Capital Research

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

Revenue breakdown by client FY 12A 1,200 1,089 1,089

1,000 869 869 769 800 Cash business, 594 594 594 20% 600 Insurance companies, 40% 376 376 400 253 253 253 188 188 188 Corporates 200 (inlcuding Aramco) , 40% -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Number of clinics Number of beds

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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).

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%

Source: Company Data, Arqaam Capital Research

Exhibit 46: Attractively priced despite RoE differential… Exhibit 47: …And EPS growth (5-yr forward CAGR) PE 14e P/E 14e 26 26 CARE CARE 24 24

22 DALLAH 22 DALLAH

20 Al Noor 20 Al Noor 18 18

16 16 MOUWASAT 14 MOUWASAT 14 NMC NMC 12 12

10 10 0% 10% 20% 30% 40% 0% 5% 10% 15% 20% FY 14e RoE (%) 5-yr EPS CAGR Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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

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 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%.

September 18 2013

Business Trends

Exhibit 49: Uniform growth across business lines (13% CAGR) Exhibit 50: Patient visitation to double by FY 17e

Revenue breakdown by segment (SAR mn) Total number of patients (000') 1,800 90 3,000 1,600 80 2,500 1,400 257 70 1,200 238 60 2,000 219 1,000 201 50 697 1,500 800 182 604 40 500 164 492 600 148 30 1,000 137 450 358 400 301 20 257 594 500 480 538 10 200 312 422 192 229 275 ------FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e Inpatient revenues Outpatient revenues Pharma revenues Number of inpatient visitors Number of outpatient visitors

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 51: Margin expansion in FY 13e on a re-pricing of Exhibit 52: Improvements to filter through to net margins insurance contracts

(SAR mn) (SAR mn) 35.0% 457 500 25.0% 368 400 450 30.0% 392 400 350 346 304 338 20.0% 279 25.0% 350 260 300 281 300 20.0% 15.0% 218 250 225 250 205 172 200 15.0% 176 200 148 10.0% 119 150 10.0% 150 100 100 5.0% 5.0% 50 50 --% -- --% -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

EBITDA EBITDA margin Net income Net margin

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 53: RoE among the highest in healthcare coverage Exhibit 54: Positive free cash flows throughout forecast period space …….

Capex vs. borrowings (SAR mn) FCF composition (SAR mn) 500 300 400 250 300 439 200 200 378 325 332 270 100 190 216 150 167 -- 100 FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e (100)

50 (200) (117) (108) (94) (206) (194) (84) (258) (300) (203) -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e (400)

Capex Debt NOPLAT Working capital changes Capex

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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. Al Mouwasat Medical Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 29

Initiation Report

September 18 2013

Mohammad Kamal [email protected] +9714 507 1743

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

Saudi Arabia – Healthcare and BUY SAR 88 Pharmaceuticals Healthcare and Pharmaceuticals / Saudi Arabia Dallah Healthcare Holding Co. 2x expansion in bed capacity drives 20% 5-yr EPS CAGR, as Bloomberg code DALLAH AB substantial cash position (27% assets) is deployed Market index SASEIDX Price target (local) 88 Strong pricing power vs. cash-paying patients Upside (%) 40.0 Initiate with Buy and SAR 88 FVE Market data 12/09/2013 Last closing price 61.75 Dallah offers an access point into the premium segment of the KSA 52 Week range 51.0-96.8 Market cap (SARmn) 2,915 healthcare sector, which enjoys particularly strong margins, and operating Market cap (USDmn) 777 leverage. The business is linked with a strong domestic brand name, and Average daily traded value (SARmn) 45.1 holds 16% of the market for private hospital beds in Riyadh, which is Average daily traded value (USDmn) 12.0 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- Year-end (local mn) 2012 2013e 2014e 2015e digit growth in its pharmaceuticals business (17% 5-yr revenue CAGR), Revenues 637.1 732.4 773.7 880.9 when accounting for newly-introduced manufacturing capability (in EBITDA 159.9 157.9 189.0 233.2 addition to Dallah’s existing distribution business). IPO proceeds of SAR Net income 133.4 112.1 151.1 185.8 540mn raised in December 2012 should be deployed towards growth EPS 2.83 2.38 3.20 3.94 within the next 2 years. We initiate with Buy and an FVE of SAR 88, P/E (current price) 21.9 26.0 19.3 15.7 BVPS 23.6 24.9 26.9 29.4 offering 40% in upside potential from current price. P/B (current price) 2.6 2.5 2.3 2.1 We see highly-defendable revenue CAGR of 16% CAGR in FY 13-18e: the EV/EBITDA (current price) 16.7 16.9 14.2 11.5 Div. yield (%) 0.2 1.7 2.1 2.2 business’s healthcare segment is the largest contributor to overall FCF margin (%) 8.8 (17.3) (3.1) 2.6 revenues (90% today, 88% in FY 15e), and we project growth at a 5-yr Net debt/EBITDA (x) (3.5) (1.7) (1.0) (0.6) CAGR of 16% (driven by 100% expansion in bed capacity). We also expect Net debt/Capital (%) (49.6) (21.8) (13.7) (9.1) double-digit growth in Dallah’s pharmaceuticals business (17% 5-yr Interest cover (x) 48.6 63.1 36.4 23.2 revenue CAGR). Newly-introduced manufacturing business lines should RoAA (%) 13.5 8.4 10.5 11.6 RoAE (%) 16.8 9.8 12.4 14.0 supplement ancillary income to the overall business. RoIC (%) 11.6 8.8 11.3 13.1 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 Price Performance market valuation implies a 15% discount to EM peers on FY 15e EPS. We DALLAH AB SASEIDX argue for superior multiples in favour of Dallah, given its substantial 239 209 margin advantage (net margin 21% vs. 10% EM) and higher EPS growth 179 (18% vs.14% EM). We believe the market is overlooking the role of bed 149 capacity growth on EPS at current multiples. We initiate with a Buy 119 89 recommendation and SAR 88 FVE. Dec-12 Mar-13 Jun-13 Risks: Target clientele impacted by health insurance coverage in KSA. Saudisation: a 10% increase in staff wages produces 6% cut to EV. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

September 18 2013

Dallah Healthcare Holding Co. Abacus Arqaam Capital Fundamental Data Year-end 2011 2012 2013e 2014e 2015e 2016e Financial summary Profitability Reported EPS 2.40 2.83 2.38 3.20 3.94 5.05 30% Diluted EPS — 2.83 2.38 3.20 3.94 5.05 20% DPS 2.23 0.14 1.07 1.28 1.38 2.53 10% BVPS 9.93 23.64 24.94 26.86 29.42 31.95

0% Weighted average shares — 23.60 47.20 47.20 47.20 47.20 2012 2013e 2014e 2015e 2016e Average market cap — 3,024.10 2,935.84 2,935.84 2,935.84 2,935.84

EBITDA Margin Net Margin Year-end 2011 2012 2013e 2014e 2015e 2016e Valuation metrics

Growth P/E (x) (current price) 25.7 21.9 26.0 19.3 15.7 12.2

100% P/E (x) (target price) 36.7 31.2 37.1 27.5 22.4 17.4 P/BV (x) (target price) 8.9 3.7 3.5 3.3 3.0 2.8 50% EV/EBITDA (x) (target price) 30.6 23.6 23.9 20.0 16.2 13.0 EV/FCF (x) 57.1 67.0 (29.7) (156.6) 163.0 21.0 0% EV/Invested capital (x) 8.0 3.4 3.2 3.0 2.7 2.5 2012 2013e 2014e 2015e 2016e Dividend yield (%) 3.6 0.2 1.7 2.1 2.2 4.1 Revenues Assets

Year-end 2011 2012 2013e 2014e 2015e 2016e Growth (%)

Gearing Revenues 11.6 20.8 15.0 5.6 13.9 18.1

0.0 0% EBITDA 14.9 29.5 (1.2) 19.7 23.3 24.5 2012 2013e 2014e 2015e 2016e -20% EBIT 10.2 33.8 (7.4) 21.4 26.5 29.9 -2.0 Net income 20.0 17.6 (15.9) 34.7 23.0 28.3 -40%

-4.0 -60% Year-end 2011 2012 2013e 2014e 2015e 2016e Margins (%) Net Debt/Capital Net Debt/EBITDA

EBITDA 23.4 25.1 21.6 24.4 26.5 27.9 Valuation 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 30

20 Year-end 2011 2012 2013e 2014e 2015e 2016e 10 Returns (%) 0 2012 2013e 2014e 2015e 2016e 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 P/E P/E Sector 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

Arqaam Capital Fundamental Data Dallah Healthcare Holding Co. Abacus Year-end 2011 2012 2013e 2014e 2015e 2016e Income statement (SAR mn) Company overview Sales revenue 527.3 637.1 732.4 773.7 880.9 1,040.2 Established in 1987, Dallah Healthcare Holding Gross profit 188.0 243.6 304.4 329.0 362.4 426.9 publicly listed in December 2012 after raising SAR SG&A (90.1) (112.6) (183.1) (181.8) (176.2) (185.2) 540mn in IPO funds. The business owns and EBITDA 123.4 159.9 157.9 189.0 233.2 290.3 operates one hospital in Riyadh (Dallah Hospital) Depreciation & Amortisation (25.5) (28.9) (36.7) (41.8) (47.0) (48.5) which operated at a capacity of 352 beds and 117 EBIT 97.9 131.0 121.3 147.2 186.2 241.8 clinics in 2012. This is in addition to Dallah’s Net interest income(expense) (2.2) (2.7) (1.9) (4.0) (8.0) (9.7) distribution and manufacturing capability vis-a-vis Associates/affiliates — — — — — — herbal medicines and cosmetic products. Dallah further operates and manages other hospitals in Exceptionals/extraordinaries — — — — — — the Kingdom (3% of revenue in FY 12A). Other pre-tax income/(expense) 21.4 6.7 11.0 11.6 12.3 12.5 Profit before tax 117.2 135.1 130.3 154.8 190.5 244.5 Zakat (3.8) (1.7) (18.2) (3.7) (4.7) (6.0) Ownership and management Minorities — — — — — — Other post-tax income/(expense) — — — — — — Shareholders Net profit 113.4 133.4 112.1 151.1 185.8 238.5 Dallah Al Baraka Holding 51.7% Arqaam adjustments (including dilution) — — — — — — Tarek Othman El Kasabi 5.2% Arqaam Net profit 113.4 133.4 112.1 151.1 185.8 238.5 Mohamad Rashed Al Fakih 5.2% Kamel Family 4.2% Year-end 2011 2012 2013e 2014e 2015e 2016e Asir company for trading 3.5% Balance sheet (SAR mn) Public 30.1% Cash and equivalents 85.0 560.5 309.0 239.4 282.5 300.1 Source: Zawya 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 Board of Directors Tangible fixed assets 380.3 437.6 657.7 824.9 965.9 990.1 Mr. Tariq Othman Alqasabi Chairman Other assets including goodwill 78.4 81.1 193.2 193.2 193.2 193.2 Dr. Mohammed Rashid Alfagih Director Total assets 698.3 1,272.7 1,381.9 1,494.9 1,716.7 1,812.9 Ammar Hasan Kamel Director Payables 50.4 54.9 61.0 64.6 76.7 92.4 Fahad Abdullah Algassem Director Interest bearing debt 77.1 5.0 43.0 58.0 143.0 100.0 Fahad Siraj Malaikah Director Other liabilities 102.1 97.3 100.7 104.4 108.3 112.5 Dr. Ahmad Saleh Babaeer Director Total liabilities 229.6 157.2 204.7 226.9 328.0 304.9 Dr. Abdulrahman Abdulaziz Alsuwailem Director Shareholders equity 468.8 1,115.6 1,177.3 1,267.9 1,388.7 1,507.9 Fares Ibrahim Alhumaid Director Minorities — — — — — — Mohiuddin Saleh Kamel Director Total liabilities & shareholders equity 698.3 1,272.7 1,381.9 1,494.9 1,716.7 1,812.9 Source: Company data

Year-end 2011 2012 2013e 2014e 2015e 2016e Cash flow (SAR mn) Cashflow from operations 138.2 142.7 129.8 185.0 211.0 252.6 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 Equity raised/(bought back) — — — — — — 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)

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

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 Exhibit 56: Business volumes to double by FY17e; revenue mix claimants, cash-paying patients accounted for 30% to remain unchanged of revenues in FY 12A ………………………………………………………..

Revenue breakdown by client FY 12A Gross revenue breakdown by segment (SAR mn) Government 1,600 Others 1% 3% 1,400 115 1,200 102 1,000 Companies 81 713 20% 65 Insurance 800 57 605 companies 49 501 46% 600 32 399 416 27 359 400 261 304 Cash clients 536 200 376 397 463 30% 264 265 313 355 -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e Inpatient revenues Outpatient revenues Pharma revenues Others

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 57: 370 new beds (2x) over the next 5 years drive patient admissions FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Number of clinics 103 113 113 139 139 284 284 284 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%

Source: Company Data, Arqaam Capital Research

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.

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

At market price FY 13e FY 14e FY 15e FY 13e FY 14e FY 15e Dallah Healthcare 26.1 19.3 15.7 16.8 14.0 11.4 Average local peers 23.0 19.3 16.9 16.2 13.9 12.3 Premium/ (discount) 13% 0% -7% 4% 1% -7% Average regional peers 21.0 17.6 15.9 14.3 12.3 11.1 Premium/ (discount) 24% 11% -1% 18% 15% 4%

Source: Company Data, Arqaam Capital Research

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%)

Source: Bloomberg, Company Data, Arqaam Capital Research

September 18 2013

DCF summary

Exhibit 60: DCF summary

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) 103 144 182 236 251 309 369 392 Depreciation & Amortization 37 42 47 49 56 70 74 76 EBITDA 140 185 229 284 307 379 443 467 Working Capital Changes (22) (12) (26) (39) (45) (92) (33) (32) Operating Cash Flow 117 174 203 246 262 287 410 435 Purchase of PPE (257) (209) (188) (73) (83) (106) (111) (114) Free Cash Flow to Firm (139) (35) 15 173 179 182 299 322 Discount Factor using WACC at 9.5% 0.97 0.89 0.81 0.74 0.68 0.62 0.56 0.52 PV of Visible FCFF (41) (31) 12 128 121 112 169 166 Terminal Value 6,082 Equity Valuation WACC parameters PV of Visible FCFF 636 Rf 4.20% PV of Terminal Value 3,135 EMRP 8.00% Enterprise Value 3,771 Adjusted Beta 0.85 Cost of Equity 11.00% Cash & Cash Equivalents 272 Less: Net (Debt) Funds (9) Marginal tax rate 2.50% Investments in associates 124 NCI -- Cost of Debt 5.00% D/C (market) 25.00% Equity Value 4,158 WACC 9.50% NOSH 47 Perpetual grow th 4.00% Equity Value per Share 88

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

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.

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)

(SAR mn) (SAR mn) 700 1,200 600 50 45 600 1,000 500 40 500 800 400 35 400 30 600 300 25 300 580 507 20 504 400 449 416 430 200 376 390 200 359 399 355 15 304 313 261 264 265 10 100 200 100 5 ------FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Outpatient revenues Outpatient admissions ('000) Inpatient revenues Inpatient admissions ('000)

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 63: Margins likely to dip on higher pre-operating costs Exhibit 64: Margins to revert to 20%+ NPM by FY 15e of current expansion

(SAR mn) 30.00% 313 350 25.0% 300 290 257 300 238 25.00% 20.0% 250 233 250 20.00% 186 200 189 200 15.0% 151 15.00% 160 158 133 150 123 150 113 112 107 10.0% 94 10.00% 100 100 5.0% 5.00% 50 50

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

EBITDA EBITDA margin Net income Net margin

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 65: We model for further leverage to fund growth Exhibit 66: Free cash flow to turn positive by FY 15e

Capex vs. borrowings (SAR mn) FCF composition 400 300 300 250 200 200 262 279 100 213 158 172 103 120 139 150 -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e (100) 100 (30) (72) (65) (73) (200) (86) 50 (209) (188) (300) (257) -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e (400)

Capex Debt NOPLAT Working capital changes Capex

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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.

Initiation Report

September 18 2013

Mohammad Kamal [email protected] +9714 507 1743

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

UAE – Healthcare and Pharmaceuticals BUY GBp 440 NMC Health Well-positioned for mandatory health cover in Northern Emirates Healthcare and Pharmaceuticals / UAE

Cheapest valuation profile in our healthcare coverage space Bloomberg code NMC LN (12.7x FY 14e EPS, 9.8x EV/EBITDA): Initiate with Buy and GBp 440 Market index ASX Index FVE Price target (local) 440 Upside (%) 40.0

NMC Health offers diversified exposure to the UAE healthcare sector. Market data 13/09/2013 NMC is a leading domestic healthcare provider with a solid track record of Last closing price 314.30 growth (EPS 3-yr CAGR 45%, nearly 2x peer average). We see the business 52 Week range 168.7-360.0 as a strong beneficiary of mandatory health insurance coverage in Dubai Market cap (GBPmn) 584 and the Northern Emirates, regulation that is expected to be in effect in FY Market cap (USDmn) 927 Average daily traded value (GBPmn) 0.35 14e. Taking precedent from Abu Dhabi’s introduction of similar regulation Average daily traded value (USDmn) 0.56 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 Year-end (local mn) 2012 2013e 2014e 2015e (ii) aggressive expansion (+100% bed capacity, +115% healthcare revenues Revenues 490.1 538.1 594.8 676.8 EBITDA 79.6 91.5 99.9 115.2 FY 18e) render it well-positioned for demand growth, and a direct Net income 58.9 67.7 73.3 80.4 beneficiary of regulatory catalysts. We initiate coverage on NMC with a EPS 0.32 0.36 0.39 0.43 Buy recommendation and a fair value estimate of GBp 440, offering 40% P/E (current price) 15.8 13.8 12.7 11.6 in upside potential vs. current price. BVPS 1.8 2.1 2.4 2.7 P/B (current price) 2.8 2.4 2.1 1.8 EV/EBITDA (current price) 12.2 10.7 9.8 8.5 Bed capacity roll out produces 5-yr healthcare revenue CAGR of 17%, but Div. yield (%) — 1.5 1.6 1.7 margins to remain flat. We see this resulting from (i) the launch of 4 new FCF margin (%) (13.0) (17.0) (12.2) (3.9) medical facilities (Brightpoint Hospital, DIP Hospital, Mussafah Day patient Net debt/EBITDA (x) 0.6 1.7 2.4 2.5 Net debt/Capital (%) 7.3 22.2 33.0 35.7 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 Interest cover (x) 5.3 4.4 4.9 5.5 RoAA (%) 11.0 9.0 9.0 9.1 Hospital (on higher healthcare demand following the implementation of RoAE (%) 27.3 19.0 17.8 17.0 mandatory healthcare cover). To fund expansion, NMC raised USD 168mn RoIC (%) 16.1 16.1 16.2 15.7 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 Price Performance peers: At 12.7x FY 14e P/E, NMC is the cheapest stock in our healthcare NMC LN coverage space. We believe NMC is trading at an unwarranted 30% 189 discount to peers, given its domestic footprint, access and exposure to 167 regulatory catalysts, growth (3-yr EPS CAGR of 15%), and superior 145 healthcare EBITDA margins of 28% (vs. 25% regional peers). We value 123 101 NMC at GBp 440/share, implying 40% in upside potential from current 79 price, using DCF. Sep-12 Dec-12 Mar-13 Jun-13 Risks: Concentration risk: >30% of NMC’s distribution revenues dependent on 5 customers. Specialized doctor costs, which remain © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. variable, may materially impact margins. See Important Notice.

September 18 2013

NMC Health Abacus Arqaam Capital Fundamental Data Year-end 2011 2012 2013e 2014e 2015e 2016e Financial summary Profitability Reported EPS 0.23 0.32 0.36 0.39 0.43 0.52 20% Diluted EPS 0.23 0.32 0.36 0.39 0.43 0.52 DPS — — 0.07 0.08 0.09 0.10 10% BVPS 0.54 1.79 2.06 2.37 2.72 3.14

0% Weighted average shares 185.71 185.71 185.71 185.71 185.71 185.71 2012 2013e 2014e 2015e 2016e Average market cap — 356 539 539 539 539

EBITDA Margin Net Margin Year-end 2011 2012 2013e 2014e 2015e 2016e Valuation metrics

Growth P/E (x) (current price) 21.7 15.8 13.8 12.7 11.6 9.6

150% P/E (x) (target price) 30.2 22.0 19.2 17.7 16.1 13.4 P/BV (x) (target price) 12.9 3.9 3.4 2.9 2.6 2.2 100% EV/EBITDA (x) (target price) 18.6 16.5 14.3 13.1 11.4 9.7 50% EV/FCF (x) (218.4) (32.6) (22.7) (28.7) (79.6) 124.8 0% EV/Invested capital (x) 15.3 4.6 4.1 3.8 3.3 3.0 2012 2013e 2014e 2015e 2016e Dividend yield (%) — — 1.5 1.6 1.7 2.1 Revenues Assets

Year-end 2011 2012 2013e 2014e 2015e 2016e Growth (%)

Gearing Revenues 14.8 10.4 9.8 10.5 13.8 13.3

3.0 40% EBITDA 24.9 13.0 15.0 9.1 15.3 17.0

2.0 EBIT 36.5 24.3 11.1 10.3 10.3 17.0 20% Net income 103.8 37.0 15.0 8.2 9.7 20.2 1.0

0.0 0% 2012 2013e 2014e 2015e 2016e Year-end 2011 2012 2013e 2014e 2015e 2016e Margins (%) Net Debt/Capital Net Debt/EBITDA

EBITDA 15.9 16.2 17.0 16.8 17.0 17.6 Valuation 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 30

20 Year-end 2011 2012 2013e 2014e 2015e 2016e 10 Returns (%) 0 2012 2013e 2014e 2015e 2016e 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 P/E P/E Sector 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

Arqaam Capital Fundamental Data NMC Health Abacus Year-end 2011 2012 2013e 2014e 2015e 2016e Income statement (USD mn) Company overview Sales revenue 443.7 490.1 538.1 594.8 676.8 766.9 NMC is a leading integrated healthcare provider in Gross profit 137.4 160.3 188.4 206.9 226.8 261.3 the UAE. The business is organised along 2 main SG&A (66.9) (80.6) (96.9) (107.1) (111.7) (126.5) segments: healthcare, and distribution and EBITDA 70.5 79.6 91.5 99.9 115.2 134.7 services. NMC currently operates 3 specialty Depreciation & Amortisation (12.0) (7.0) (10.9) (10.9) (17.0) (19.8) hospitals in Abu Dhabi, Dubai and Al Ain, 1 general EBIT 58.4 72.6 80.7 89.0 98.2 114.9 hospital in Dubai, 1 day patient medical center in Net interest income(expense) (17.0) (13.7) (18.3) (18.0) (18.0) (18.3) Sharjah, and 8 pharmacies. In 2012, the company Associates/affiliates — — — — — — acquired an operating day patient medical center in Dubai- the BR Medical Suites in Dubai Healthcare Exceptionals/extraordinaries — — — — — — City. In addition, the company plans to develop 2 Other pre-tax income/(expense) 2.4 0.9 6.0 3.0 1.0 1.0 new hospitals, and 2 medical centers. In 2012, the Profit before tax 43.8 59.8 68.4 74.0 81.2 97.6 company’s facilities treated 1.27mn outpatients Income tax expenses — — — — — — and 35.2k inpatients, operating 230 beds. Minorities 0.8 0.9 0.7 0.7 0.8 1.0 Other post-tax income/(expense) — — — — — — Ownership and management Net profit 43.0 58.9 67.7 73.3 80.4 96.6 Arqaam adjustments (including dilution) — — — — — — Shareholders Arqaam Net profit 43.0 58.9 67.7 73.3 80.4 96.6 Bin Butti Saeed 28% Shetty B R 20% Year-end 2011 2012 2013e 2014e 2015e 2016e Bin Butti Khalifa 10% Balance sheet (USD mn) Infinite Investments LLC 7% Blackrock 4% Cash and equivalents 54.1 257.5 164.2 51.9 9.7 7.0 Others 1% Receivables 153.5 181.4 206.4 236.3 274.4 315.2 Public 30% Inventories 54.2 72.5 79.5 91.4 110.9 128.8 Source: Zawya Tangible fixed assets 94.9 201.7 339.5 459.1 526.9 566.6 Board of Directors Other assets including goodwill — 2.6 2.6 2.6 2.6 2.6 Mr H J Mark Tompkins Chairman Total assets 356.6 715.6 792.2 841.3 924.6 1,020.3 Mr Khalifa Bin Butti Vice Chairman Payables 63.9 68.6 76.6 90.3 107.2 123.3 Mr Justin A S Jew itt Director Mr Patrick James Meade Director Interest bearing debt 182.2 303.6 320.0 295.0 295.0 295.0 Mr Heather Law rence Obe Director Other liabilities 10.1 11.7 13.3 15.1 17.1 19.5 HE Saeed Bin Butti Director Total liabilities 256.2 384.0 409.9 400.4 419.4 437.8 Mr Prasanth Manghat Board Secretary Source: Zawya 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) Cashflow from operations 10.9 41.4 56.1 57.9 58.6 76.2 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) — — Other investing/financing cash flows 25.0 (152.8) — — — — Net cash flow (24.4) 60.2 (89.0) (112.3) (42.2) (2.6) Change in working capital (62.1) (40.1) (24.0) (28.1) (40.8) (42.6)

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

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

Dubai and Northern Emirates, 35% Healthcare, Distribution, 48% 52% Abu Dhabi , 65%

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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.

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%

Source: Company Data, Arqaam Capital Research

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%)

Source: Bloomberg, Company Data, Arqaam Capital Research

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

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 20.8 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

Average regional peers 21.2 17.6 15.9 14.3 12.3 11.1 Premium/ (discount) -35% -28% -27% -26% -20% -23%

Source: Company Data, Arqaam Capital Research

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 Exhibit 73: Attractive in terms of EPS CAGR: growth outlook second distribution business) but ignores (i) superior healthcare only to Dallah (Buy, SAR 88), but market valuation margins (28% NMC vs. 25% peers) and (ii) strategic value remains cheapest among peers of distribution business …………………………………………………………

PE 14e PE 14e

24.0 24 CARE CARE 22.0 22

20.0 20 DALLAH DALLAH 18.0 18 Al Noor Al Noor 16.0 MOUWASAT 16 MOUWASAT 14.0 14

12.0 NMC 12 NMC

10.0 10 15% 20% 25% 30% 35% 5% 10% 15% 20% 25% FY 14e EBITDA margin 5-yr EPS CAGR Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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 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%

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%)

Source: Bloomberg, Company Data, Arqaam Capital Research

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

Exhibit 75: DCF valuation summary

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 Depreciation & Amortization 10 11 17 20 22 25 25 26 EBITDA 92 100 115 135 152 180 194 201 Working Capital Changes (24) (28) (41) (43) (36) (43) (21) (25) Operating Cash Flow 68 72 74 92 116 137 173 176 Purchase of PPE (148) (130) (85) (60) (44) (49) (51) (53) Free Cash Flow to Firm* (80) (59) (10) 33 72 88 122 123 Discount Factor using WACC at 9.7% 0.97 0.89 0.81 0.74 0.67 0.61 0.56 0.51 PV of Visible FCFF (23) (52) (8) 24 49 54 68 63 Terminal Value 2,236 Equity Valuation WACC parameters PV of Visible FCFF 174 13% Rf 4.5% PV of Terminal Value 1,137 87% EMRP 8.0% Enterprise Value 1,311 Adjusted Beta 0.9 Cost of Equity 11.3% Cash & Cash Equivalents 248 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 1,254 WACC 9.7% NOSH 186 Perpetual grow th 4.0% 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 Source: Company Data, Arqaam Capital Research *FCF calculation based on adjusted EBIT rather than net income

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 76: DCF sensitivity to valuation parameters

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 Source: Company Data, Arqaam Capital Research

September 18 2013

Business trends

Exhibit 77: NMC revenues evenly split between healthcare and Exhibit 78: Expansions and improvement in bed utilisation distribution business lines rates drive healthcare revenue CAGR > 14%

Revenue breakdown by segment (USD mn) Healthcare revenues by hospital (USD mn) 1,000 450 900 400 800 350 700 387 300 600 364 250 339 500 316 200 294 400 271 150 253 300 229 100 448 506 200 377 274 313 50 100 219 252 182 -- -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e AD specialty Dubai specialty Al Ain specialty Dubai general Sharjah MC Healthcare revenues Distrubution revenues Health Suites Brightpoint Mussafah DIP Khalifa City

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 79: Margins to remain flat with the opening of new Exhibit 80: ...but are expected to improve as utilization rates hospitals… on new facilities ramp up in FY 15e

(USD mn) (USD mn) 180 20% 120 14% 160 19% 13% 18% 100 140 12% 17% 120 80 11% 16% 100 10% 15% 60 80 14% 9% 60 13% 40 8% 40 12% 7% 20 20 11% 6% -- 10% -- 5% FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

EBITDA EBITDA margin Net income Net margin

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 81: Leverage to rise to fund expansion (USD 290mn Exhibit 82: FCF to turn positive in FY 15e+ CAPEX)

(USD mn) (USD mn) 160 2.5 100 15% 80 140 10% 2.0 60 120 40 5% 100 1.5 20 0% 80 -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e -5% 60 1.0 (20) (40) -10% 40 0.5 (60) -15% 20 (80) -- - (100) -20% FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Capex Net D/E 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 Date of No. Of Bed Total patient Existing facilities Region establishment beds occupancy admissions Abu Dhabi Specialty Abu Dhabi 1976 100 68% 911,172 hospital 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

Source: Company Data, Arqaam Capital Research

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

Source: Company Data, Arqaam Capital Research

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%

Source: Company Data, Arqaam Capital Research

Initiation Report

September 18 2013

Mohammad Kamal [email protected] +9714 507 1743

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

Saudi Arabia – Healthcare and HOLD Pharmaceuticals SAR 48

National Medical Care Co. Healthcare and Pharmaceuticals / Saudi Arabia Fundamentals fully priced in at 23.4x FY 14e P/E, 15.7x Bloomberg code CARE AB EV/EBITDA; Initiate with a Hold recommendation and SAR 48 FVE Market index SASEIDX Price target (local) 48

National Medical Care- CARE holds the second largest network of Upside (%) -11.5 hospital bed in the Kingdom (420 in FY 12A), and is active in the Market data 12/09/2013 wholesale and distribution of pharmaceutical and medical products in the Last closing price 53.75 country. We believe that the market is fully pricing in the impact of bed 52 Week range 49.6-200.0 Market cap (SARmn) 2,411 capacity additions on growth. We initiate coverage on CARE with a Hold Market cap (USDmn) 643 recommendation and a fair value estimate of SAR 48. Average daily traded value (SARmn) 46.9 Average daily traded value (USDmn) 12.5 Growth is a function of bed capacity expansion, which will total 200 additional beds at its National hospital facility (+48%), taking its share of Year-end (local mn) 2012 2013e 2014e 2015e the Riyadh market to 16% from 12% today. Coupled with the roll out of 4 Revenues 524.7 557.7 600.5 676.8 family health centers in the city by FY 16e, we expect the business’s EBITDA 131.9 134.9 145.5 163.7 Net income 105.0 97.1 103.0 115.6 capacity roll out generating 9% revenue CAGR over the next 5 years. We EPS 2.34 2.16 2.30 2.58 expect operating margins to reflect mild compression in FY 13-15e (- P/E (current price) 23.0 24.8 23.4 20.9 140bps in GPM, -90bps in EBITDA margins) as we forecast (i) a rise in BVPS 13.6 18.5 19.6 20.9 P/B (current price) 4.0 2.9 2.7 2.6 staffing costs, associated with the launch of the new building at National EV/EBITDA (current price) 17.3 16.9 15.7 13.9 Hospital (H1 14e), and (ii) greater revenue contribution from CARE’s PDM Div. yield (%) 2.0 2.2 2.1 2.4 FCF margin (%) (0.7) (2.6) (2.2) 10.7 unit, which operates at vastly lower margins (2%). We expect a degree of Net debt/EBITDA (x) (0.3) (1.1) (0.6) (0.6) margin support starting FY 16e, as we believe scale economies and rising Net debt/Capital (%) (6.2) (16.0) (8.0) (8.9) bed utilisation rates will begin to filter through P&L on the launch of a new Interest cover (x) — 20.5 16.5 15.1 RoAA (%) 14.2 10.3 8.9 9.2 wing at the National Hospital, which will include a premium healthcare RoAE (%) 18.1 13.5 12.0 12.7 RoIC (%) 15.4 10.6 10.1 10.7 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 Price Performance a degree on P&L pressure as payments collected from insurers are CARE AB SASEIDX typically lower (we estimate as much as 25%) than what is otherwise 430 collected from ‘direct payment’ clients. 362 294 Valuation: We value CARE at SAR 48/share, using DCF and a WACC of 226 9.8% (11.4% Re, 0.9 Beta, 5% Rd) and a terminal growth rate of 4%. At 158 90 23.4x FY 14e, EPS, CARE trades at 35% and 20% premiums to regional and Mar-13 Jun-13 Sep-13 local peers which we warrant on CARE’s competitive position (16% market share in Riyadh, FY 14e). We initiate with a Hold recommendation. Risk: © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. The shift to insurance-based patient collections may cut EBITDA margin by See Important Notice. 150bps+ on average.

September 18 2013

National Medical Care Co. Abacus Arqaam Capital Fundamental Data Year-end 2011 2012 2013e 2014e 2015e 2016e Financial summary Profitability Reported EPS 2.11 2.34 2.16 2.30 2.58 2.82 30% Diluted EPS 2.11 2.34 2.16 2.30 2.58 2.82 20% DPS 0.64 1.06 1.17 1.15 1.29 1.41 10% BVPS 12.32 13.60 18.50 19.65 20.94 22.35

0% Weighted average shares 44.85 44.85 44.85 44.85 44.85 44.85 2012 2013e 2014e 2015e 2016e Average market cap — — 2,472 2,472 2,472 2,472

EBITDA Margin Net Margin Year-end 2011 2012 2013e 2014e 2015e 2016e Valuation metrics

Growth P/E (x) (current price) 25.5 23.0 24.8 23.4 20.9 19.0

40% P/E (x) (target price) 22.5 20.3 22.0 20.7 18.4 16.8 P/BV (x) (target price) 3.9 3.5 2.6 2.4 2.3 2.1 20% EV/EBITDA (x) (target price) 16.4 15.2 14.8 13.7 12.2 11.3 EV/FCF (x) 77.8 (543.2) (139.0) (153.7) 27.5 18.4 0% EV/Invested capital (x) 3.6 3.2 2.2 2.0 1.8 1.7 2012 2013e 2014e 2015e 2016e Dividend yield (%) 1.2 2.0 2.2 2.1 2.4 2.6 Revenues Assets

Year-end 2011 2012 2013e 2014e 2015e 2016e Growth (%)

Gearing Revenues 7.5 14.5 6.3 7.7 12.7 9.7

0.0 0% EBITDA 13.7 8.4 2.3 7.8 12.6 8.2 2012 2013e 2014e 2015e 2016e -0.5 EBIT 16.0 9.3 (2.6) 8.1 13.9 9.4 -10% Net income 11.8 10.8 (7.5) 6.1 12.2 9.6 -1.0

-1.5 -20% Year-end 2011 2012 2013e 2014e 2015e 2016e Margins (%) Net Debt/Capital Net Debt/EBITDA

EBITDA 26.6 25.1 24.2 24.2 24.2 23.9 Valuation 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 30

20 Year-end 2011 2012 2013e 2014e 2015e 2016e 10 Returns (%) 0 2012 2013e 2014e 2015e 2016e 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 P/E P/E Sector 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

Arqaam Capital Fundamental Data National Medical Care Co. Abacus Year-end 2011 2012 2013e 2014e 2015e 2016e Income statement (SAR mn) Company overview 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 National Medical Care owns and operates 2 SG&A (27.3) (31.1) (33.5) (36.0) (40.6) (44.6) hospitals in Riyadh with a total capacity of 420 EBITDA 121.7 131.9 134.9 145.5 163.7 177.2 beds and 100 clinics. Both hospitals were owned by Depreciation & Amortisation (26.5) (27.9) (33.6) (35.9) (39.0) (40.6) the General Organisation for Social Insurance EBIT 95.2 104.0 101.4 109.6 124.8 136.5 (GOSI) prior to 2003. In March 2013, National Net interest income(expense) — — (4.9) (6.7) (8.3) (8.1) Medical Care Company launched an Initial Public Associates/affiliates — — — — — — Offering and raised SAR 175mn in the process. Exceptionals/extraordinaries — — — — — — Other pre-tax income/(expense) 5.9 7.4 7.4 7.4 7.4 7.4 Ownership and management Profit before tax 101.1 111.4 103.8 110.3 123.9 135.8 Zakat (6.3) (6.4) (6.8) (7.3) (8.3) (9.1) Minorities — — — — — — Shareholders General Organization for Social Insurance- Saudi Arabia35.1% Other post-tax income/(expense) — — — — — — Fal Holdings Arabia Company 26.6% Net profit 94.7 105.0 97.1 103.0 115.6 126.7 Public 38.3% Arqaam adjustments (including dilution) — — — — — — Source: Zawya Arqaam Net profit 94.7 105.0 97.1 103.0 115.6 126.7

Board of Directors Year-end 2011 2012 2013e 2014e 2015e 2016e AbdullahBinMOhammed Al Issa Chairman Balance sheet (SAR mn) Adbulaziz Saif Al Saif Director Cash and equivalents 89.6 71.8 247.1 250.9 261.4 306.6 Yasser Saqr Al Otaibi Director Receivables 165.5 190.6 204.7 225.4 257.7 284.8 Bader Fahad Al Athel Director Adeeb AbdulrahmanAl Sowailim Director Inventories 27.8 35.3 41.7 47.4 54.6 61.5 Dr. Shwaimi Hwaimel Al Fowiz Director Tangible fixed assets 365.9 459.1 559.8 660.4 679.9 679.9 Adel Mohammed Al Krashe Director Other assets including goodwill 35.8 37.9 37.9 37.9 37.9 37.9 Source: Company data 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 Other liabilities 83.0 90.7 94.4 98.8 104.2 110.2 Total liabilities 131.8 184.6 261.7 340.8 352.6 368.4 Shareholders equity 552.8 610.1 829.7 881.2 939.0 1,002.3 Minorities — — — — — — 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) Cashflow from operations 89.6 117.2 120.0 123.5 131.0 149.2 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 Equity raised/(bought back) — — — — — — 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 Change in working capital (42.3) (19.3) (14.3) (19.9) (28.9) (24.1)

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

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

Number of clinics 175 175 175 192 209 226 243 243 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

Source: Company Data, Arqaam Capital Research

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

Revenue breakdown by client 45% 39% 40% 36% 34% 34% 35% 32% 33% 30% 25% 20% 20% 18% 14% 16% 15% 12% 13% 10% 5% --% FY 10A FY 11A H1 12A

Insurance companies Direct companies GOSI Cash clients

Source: Company Data, Arqaam Capital Research

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

Source: Bloomberg, Company Data, Arqaam Capital Research

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).

Exhibit 89: DCF summary

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) 95 102 116 127 141 156 163 170 Depreciation & Amortization 34 36 39 41 45 55 57 59 EBITDA 128 138 155 168 185 210 220 229 Working Capital Changes (14) (20) (29) (24) (22) (26) (12) (11) Operating Cash Flow 114 118 127 144 163 184 208 217 Purchase of PPE (134) (136) (58) (41) (40) (44) (45) (47) Free Cash Flow to Firm (20) (18) 68 103 123 140 163 171 Discount Factor using WACC at 9.8% 0.97 0.89 0.81 0.74 0.67 0.61 0.56 0.51 PV of Visible FCFF (6) (16) 55 76 83 85 90 86 Terminal Value 3,058 Equity Valuation WACC parameters PV of Visible FCFF 454 23% Rf 4.2% PV of Terminal Value 1,547 77% EMRP 8.0% Enterprise Value 2,000 Adjusted Beta 0.9 Cost of Equity 11.40% Cash & Cash Equivalents 231 Less: Net (Debt) Funds (98) Marginal tax rate 2.50% Investments in associates -- NCI -- Cost of Debt 5.00% D/C (market) 25.00% Equity Value 2,133 WACC 9.80% NOSH 45 Perpetual grow th 4.00% Equity Value per Share 48

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

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.

September 18 2013

Relative value

Exhibit 90: <10% premium to EM peer set at FY 14e P/E and EV/EBITDA 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%

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%)

Source: Bloomberg, Company Data, Arqaam Capital Research

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 DCF sensitivity- Cost of debt vs. D/E Rf Growth Cost of debt D/(D+E) 48 3.40% 3.70% 4.00% 4.30% 4.60% 48 15.00% 20.00% 25.00% 30.00% 35.00% 4.80% 41 42 44 46 47 6.00% 42 43 45 48 50 4.50% 43 44 46 47 49 5.50% 42 44 46 49 52 4.20% 44 46 48 50 52 5.00% 43 45 48 51 54 3.90% 46 48 50 52 54 5.50% 42 44 46 49 52 3.60% 48 50 52 54 57 6.00% 42 43 45 48 50 Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

September 18 2013

Business trends

Exhibit 93: Inpatient and surgery contributions to remain >50% Exhibit 94: Patient treatments to reach 735K by FY 17e

Revenue breakdown by segment (SAR mn) ('000) ('000) 900 25 800 800 86 700 700 68 20 50 166 600 600 34 153 27 141 500 500 15 129 93 15 3 106 117 86 -- 79 400 400 97 71 98 62 65 60 10 300 58 300 459 200 407 436 200 342 349 366 5 271 298 100 100 ------FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Inpatients and surgeries outpatients Pharmacy Medical distribution unit Number of inpatient visits Number of outpatient visits

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 95: Slight margin compression in FY 13e with the launch Exhibit 96: Which will filter through to net income of the new wing at the National Hospital

(SAR mn) (SAR mn) 30.0% 250 25.0% 160 140 140 25.0% 195 127 200 20.0% 116 177 120 164 105 103 20.0% 145 95 97 132 135 150 15.0% 85 100 122 15.0% 107 80 100 10.0% 60 10.0% 40 5.0% 50 5.0% 20 --% -- --% -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

EBITDA EBITDA margin Net income Net margin

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 97: Capex vs. borrowings Exhibit 98: Free cash flows to turn positive by FY 15e

(SAR mn) FCF composition (SAR mn) 250 180 160 200 140 150 120 100 168 185 138 155 100 50 101 115 125 128 80 -- 60 FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e (50) 40 (100) (41) (40) 20 (60) (134) (136) (58) (150) -- (121) (64) FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e (200) Capex Debt NOPLAT Working capital changes Capex

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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.

Initiation Report

September 18 2013

Mohammad Kamal [email protected] +9714 507 1743

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

UAE – Healthcare and Pharmaceuticals HOLD GBp 840 Al Noor Hospitals Group We acknowledge market leadership and growth, but stock Healthcare and Pharmaceuticals / UAE performance suggests it is all in the price at 17.5x FY 14e P/E, 10.0x EV/EBITDA Bloomberg code ANH LN Market index ASX Initiate with Hold and GBp 840/share FVE Price target (local) 840 Upside (%) -0.4

Al Noor is a leading private healthcare provider in Abu Dhabi, with a

dominant share of the market for outpatients (35%) and inpatients Market data 13/09/2013 Last closing price 843.00 (39%). The company operates 3 hospitals and 10 medical centers at a total 52 Week range 570.0-860.0 capacity of 227 beds. Going forward, the business plans to (i) add 2 new Market cap (GBPmn) 985 centers to its network in each year, and (ii) raise its roster of revenue- Market cap (USDmn) 1,565 generating doctors to 445 (+30%) by the end of FY 16e. We believe that Average daily traded value (GBPmn) 0.0 this would result in 5-yr revenue CAGR of c.5%, at the very least. To fund Average daily traded value (USDmn) 0.0 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 Year-end (local mn) 2012 2013e 2014e 2015e meeting 45% of CAPEX rollout. We believe that the market has fully priced Revenues 324.4 391.0 437.8 451.4 in growth at current multiples (17.5x/17.2x FY 14e/15e P/E). We initiate EBITDA 70.6 79.7 101.4 104.5 with Hold and an FVE of GBp 840. 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 We expect modest revenue CAGR of 5% driven by (i) the 5 new medical BVPS — 1.5 2.0 2.4 facilities due for launch by FY 13e (Mamoura, Sanaya and Oman), (ii) the P/B (current price) (539.9) 8.8 6.8 5.5 launch of 2 facilities each year thereafter, on average, (iii) the introduction EV/EBITDA (current price) 14.3 12.7 10.0 9.7 of new services including obstetrics, gynaecology and paediatrics, at Div. yield (%) 2.0 1.7 2.3 2.3 FCF margin (%) 15.8 14.9 17.2 20.2 existing facilities and (iv) the addition of 100 revenue-generating doctors Net debt/EBITDA (x) 1.0 (1.3) (1.4) (1.9) to its roster (+30%) as part of the ‘Programme Leaders’ initiative (of which Net debt/Capital (%) 57.0 (57.7) (61.4) (68.9) 45 doctors have been employed). Interest cover (x) 25.3 21.9 — — RoAA (%) 34.0 31.2 32.0 26.7 Growth in medical staff costs to challenge margins in the short term: We RoAE (%) 119.9 76.1 43.5 35.0 RoIC (%) 65.9 38.5 38.0 31.3 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 Price Performance EM peers, which we think is fair given muted growth (5% CAGR) and ANH LN ASX margin pressure. 148 136 Risks: Delays in the launch of new medical facilities. Costs related to 124 specialised doctors could materially impact margin. For every 5% increase 112 in medical staff costs, we estimate a 170bps compression in EBITDA 100 88 margin and a 5% cut to our FVE. Jun-13

September 18 2013

Al Noor Hospitals Group Abacus Arqaam Capital Fundamental Data Year-end 2011 2012 2013e 2014e 2015e 2016e Financial summary Profitability Reported EPS 0.43 0.52 0.57 0.76 0.78 0.82 30% Diluted EPS — — 0.57 0.76 0.78 0.82 20% DPS 0.20 0.26 0.23 0.31 0.31 0.33 10% BVPS 0.89 (0.02) 1.52 1.98 2.45 2.94

0% Weighted average shares — — 58.44 116.87 116.87 116.87 2012 2013e 2014e 2015e 2016e Average market cap — — 1,205.74 1,215.02 1,224.30 1,233.58

EBITDA Margin Net Margin Year-end 2011 2012 2013e 2014e 2015e 2016e Valuation metrics

Growth P/E (x) (current price) 30.8 26.0 23.5 17.5 17.2 16.4

60% 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 40% EV/EBITDA (x) (target price) 24.9 20.7 18.4 14.5 14.0 13.4 20% EV/FCF (x) 33.5 28.6 25.1 19.5 16.0 15.9 0% EV/Invested capital (x) 14.0 15.7 8.2 6.3 5.1 4.3 2012 2013e 2014e 2015e 2016e Dividend yield (%) 1.5 2.0 1.7 2.3 2.3 2.4 Revenues Assets

Year-end 2011 2012 2013e 2014e 2015e 2016e Growth (%)

Gearing Revenues 21.4 10.7 20.6 12.0 3.1 3.1

2.0 100% EBITDA 30.4 20.1 12.9 27.2 3.1 4.4 50% 0.0 EBIT 33.3 22.2 11.5 28.4 1.7 5.3 2012 2013e 2014e 2015e 2016e 0% Net income 33.2 18.7 10.6 33.9 1.7 5.3 -2.0 -50% -4.0 -100% Year-end 2011 2012 2013e 2014e 2015e 2016e Margins (%) Net Debt/Capital Net Debt/EBITDA

EBITDA 20.1 21.8 20.4 23.2 23.2 23.5 Valuation 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 30

20 Year-end 2011 2012 2013e 2014e 2015e 2016e 10 Returns (%) 0 2012 2013e 2014e 2015e 2016e 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 P/E P/E Sector 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

Arqaam Capital Fundamental Data Al Noor Hospitals Group Abacus Year-end 2011 2012 2013e 2014e 2015e 2016e Income statement (USD mn) Company overview Sales revenue 292.9 324.4 391.0 437.8 451.4 465.3 Established in 1985, Al Noor hospital is the largest Gross profit 117.7 135.7 158.5 188.7 191.1 196.7 private healthcare provider in Abu Dhabi in terms SG&A (67.4) (74.2) (89.9) (100.7) (101.6) (102.4) of the number of patients treated. It owns and EBITDA 58.8 70.6 79.7 101.4 104.5 109.1 operates 3 hospitals and 9 medical centers, with a Depreciation & Amortisation (8.5) (9.1) (11.1) (13.3) (15.0) (14.8) 35% share of the market for outpatients and 39% EBIT 50.3 61.5 68.6 88.0 89.5 94.3 for inpatients in Abu Dhabi. In 2012, it operated Net interest income(expense) (0.6) (2.4) (3.1) — — — 227 beds and treated 1.5mn patients. Associates/affiliates — — — — — — Exceptionals/extraordinaries — — — — — — Ownership and management Other pre-tax income/(expense) 1.0 1.2 1.2 1.2 1.2 1.2 Profit before tax 50.8 60.3 66.7 89.3 90.7 95.5 Income tax expense — — — — — — Shareholders Minorities — — — — — — Sheikh Butti Al Hamed Moha 28.4% Other post-tax income/(expense) — — — — — — Astro II SPV 28.3% Net profit 50.8 60.3 66.7 89.3 90.7 95.5 Alom Kassem 10.5% Arqaam adjustments (including dilution) — — — — — — Govt of Singapore Inv. Corp. 3.5% Public 29.5% Arqaam Net profit 50.8 60.3 66.7 89.3 90.7 95.5 Source: Zawya Year-end 2011 2012 2013e 2014e 2015e 2016e Board of Directors Balance sheet (USD mn) Ian Tyler Chairman Cash and equivalents 61.3 55.5 102.9 142.3 197.3 251.3 Dr. Kassem Alom Chief Executive Officer Receivables 75.7 82.8 100.7 113.9 118.7 122.4 Seamus Keating Independent Director Inventories 14.3 14.2 19.1 21.2 22.8 23.6 Sheikh Mansoor Bin Butti Al HamedNon-Executive Director Tangible fixed assets 22.8 20.6 19.4 26.1 26.1 31.3 Ahmad Nimer Non-Executive Director Faisal Belhoul Non-Executive Director Other assets including goodwill 0.6 6.2 6.2 6.2 6.2 6.2 Bill Ward Non-Executive Director Total assets 174.7 179.4 248.4 309.8 371.2 434.8 Mubarak Matar Al Hamiri Non-Executive Director Payables 51.6 43.6 54.2 58.7 62.0 64.8 Source: Company data Interest bearing debt 2.9 125.4 — — — — Other liabilities 16.7 13.3 16.0 19.3 22.9 26.5 Total liabilities 71.3 182.3 70.2 78.0 85.0 91.3 Shareholders equity 103.5 (2.9) 178.2 231.7 286.2 343.5 Minorities — — — — — — 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) Cashflow from operations 51.9 58.0 68.3 95.2 106.3 112.3 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) — — — Other investing/financing cash flows 1.0 (5.0) — — — — Net cash flow 19.0 (0.3) 47.3 39.5 55.0 54.1 Change in working capital (9.6) (15.5) (12.2) (10.7) (3.1) (1.7)

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

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 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%

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%)

Source: Bloomberg, Company Data, Arqaam Capital Research

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 Exhibit 101: Cash flow margins sit mid-table, valuation appears coverage space appropriate at current P/OCF multiple

P/E 14e P/OCF 20 CARE CARE 24 19

22 18

20 DALLAH 17 Al Noor NMC DALLAH Al Noor 16 18 15 16 MOUWASAT MOUWASAT 14 14 NMC 13

12 12 5% 7% 9% 11% 13% 15% 17% 19% 21% 23% 5% 10% 15% 20% 25% 30% 5-yr EPS CAGR CFO/sales Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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.

September 18 2013

DCF summary

Exhibit 102: DCF summary

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 Depreciation & Amortization 11 13 15 15 15 15 15 15 EBITDA 80 101 105 109 110 112 115 118 Working Capital Changes (12) (11) (3) (2) (2) (4) (1) 0 Operating Cash Flow 68 91 101 107 108 108 114 118 Purchase of PPE (10) (20) (15) (20) (20) (15) (15) (15) Free Cash Flow to Firm 58 71 86 87 88 93 99 103 Discount Factor using WACC at 9.5% 0.97 0.89 0.81 0.74 0.68 0.62 0.57 0.52 PV of Visible FCFF 16 63 70 65 60 58 56 53 Terminal Value 1,973 Equity Valuation WACC parameters PV of Visible FCFF 442 Rf 4.5% PV of Terminal Value 1,023 EMRP 8.0% Enterprise Value 1,465 Adjusted Beta 0.80 Cost of Equity 10.9% Cash & Cash Equivalents 88 Less: Net (Debt) Funds -- Marginal tax rate 2.50% Investments in associates -- NCI -- Cost of Debt 5.00% D/C (market) 25.00% Equity Value (USD) 1,553 WACC 9.4% NOSH 117 Perpetual grow th 4.00% 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 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.

September 18 2013

Business trends

Exhibit 103: Revenues growth driven by fee-generating doctors. Exhibit 104: 30% increase in income-generating doctors is We expect a 5-yr revenue CAGR of 9% expected in FY 13e

(USD mn) (mn) 500 5 5 3 600 2.5 450 100 5

469 479 400 500 442 456 428 2.0 350 7 2 381 400 300 315 1.5 284 250 300 434 439 444 449 234 200 1.0 332 334 200 150 325 325

0.5 100 100 50 -- - -- FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 18e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e

Revenues Number of patients Revenue-generating doctors Additions

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 105: EBITDA forecasts Exhibit 106: Net income forecasts

(USD mn) (USD mn) 120 25.0% 120 109 110 112 25.0% 105 101 96 97 98 100 89 91 100 20.0% 20.0% 80 80 80 71 67 15.0% 15.0% 59 60 60 60 51 45 10.0% 38 10.0% 40 40 5.0% 20 5.0% 20

-- --% -- --% FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 18e FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e FY 18e

EBITDA EBITDA margin Net income Net margin

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

Exhibit 107: Superior RoE on low equity base Exhibit 108: We expect working capital stability at 17% revenues

60% WC/revenues 50% 49% 18% 50% 16% 16% 17% 17% 16% 39% 40% 37% 34% 14% 13% 32% 12% 29% 29% 30% 27% 27% 28% 12% 25% 24% 22% 20% 10% 20% 8%

10% 6% 4% --% 2% FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e FY 17e --% RoE RoA FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e

Source: Company Data, Arqaam Capital Research Source: Company Data, Arqaam Capital Research

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

Source: Company Data, Arqaam Capital Research

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 Name of Facility Type Date of establishment No. of beds Al Ain Hospital Hospital 2005 50 Al Ain clinic Medical center 2009 NA AL Yahar clinic Medical center 2012 NA

Source: Company Data, Arqaam Capital Research

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 Name of Facility Type Date of establishment No. of beds Al Mirfa clinic Medical center 2011 50 Beda Zayed clinic 1 &2 Medical center 2003 NA

Source: Company Data, Arqaam Capital Research

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

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