JEDDAH: Listed health care companies in Saudi Arabia will continue to report good growth in the coming years, according to Al-Rajhi Capital Research.

“Almost all the listed health care companies posted decent Q1 2015 results, broadly in-line with our estimates,” Al-Rajhi Capital Research said in a report.

Q1 results were  important as many new facilities were opened recently —  Dallah opened Northern clinics building, while Mouwasat opened a new hospital in Riyadh toward the end of last year and Al-Hammadi soft-launched its hospital in Al Suweidhi.  The in-line Q1 results were a testimony to the strong progress achieved by health care companies in the Kingdom, it said.

Since health care companies are expanding their capacities, there could be an occasional spike in costs, and therefore the best indicators of their performances would be their revenues and gross profits.

New hospitals to be constructed may not yet directly compete with the existing private hospitals but are likely to increase costs as they would compete equally for the available talent pool of doctors and other hospital staff, said the report.

Overall, the valuation multiples are not cheap, but unlikely to contract as well, given the immense potential and triggers. All the health care stocks have been included in the MSCI small cap index announced recently, which bodes well for the stocks. 

“Based on our estimates, all companies are trading at around their fair values and hence we reiterate our Neutral rating on all the companies,” said the report.

It also said that Q1 2015 has been significant for the health care companies as a slew of new hospitals came online recently. Of late, Mouwasat opened its Riyadh hospital, Al-Hammadi launched its hospital at Al-Suweidhi and Dallah opened its Northern clinics building. The broadly in-line results were an affirmation of the solid execution capabilities of hospitals in exploiting the demand for private health care services.

Volatility in profits has been one of the concerns for investors, the report pointed out. Aggregate profit grew only by 5 percent y-o-y vs a top-line growth of 14 percent y-o-y. “We believe this is not a major concern since companies are scaling up their capacities and there could be an increase in costs,” said the report.

“For example, Mouwasat reported a net loss from its newly-opened Riyadh hospital while Dallah had seen marketing expenses shoot up in the previous quarters, leading to a decline in its net profit despite a strong top-line performance. As a result, we remind investors to focus on the revenue or gross profit levels during the early years,” said Al-Rajhi Capital Research.

It said health care companies in Saudi Arabia are facing challenges in hiring doctors and other hospital staff.

“We believe these challenges will become a bit stiffer when the government & other new private players gradually enter the market as they will compete equally for the talent pool of doctors and other hospital staff available. This will ultimately result in increase in staff and hiring costs,” said the report.