RIYADH — The growth in demand for healthcare is expected to remain strong in the coming years due to low healthcare penetration in Saudi Arabia, a growing and ageing population, and an increase in ‘lifestyle diseases', NCB Capital said in a report. “The health sector in Saudi Arabia remains relatively under penetrated with around 2.2 beds per 1000 population against a global average of 2.7, and around 4 for the West and Europe. This is coupled with an expected population growth of 2.13 percent over the coming four years and with life expectancy set to increase from 74.1 years to 75.3 years by 2016E. In addition to this, the increasing occurrence of “lifestyle diseases” will support demand for high quality healthcare in Saudi Arabia,” said Farouk Miah, Head of Equity Research at NCB Capital. The Saudi health care sector is the largest in the GCC, according to the World Bank, health expenditure in Saudi Arabia represented 4.3 percent of its GDP in 2010. This translates into approximately SR68.7bn from both the private and public sectors. The share of public health of GDP contributed to around 2.7 percent, while the private sector stood at 1.6 percent. Based on NCB Capital's estimates, the expenditure on the health sector is expected to increase to SR174 billion in 2017, CAGR growth of 16.8 percent between 2011 and 2017. The increase in spending is due to the growing demand drivers for healthcare, it added. The government is playing an increasingly active role in the provision of healthcare in Saudi Arabia, thus positioning it as a vital factor in terms of the sectors' outlook. Healthcare expenditure by the government has grown at a CAGR of 18.0 percent between 2005 and 2012. The total Saudi budget came in at SR690 billion in 2012, versus SR580 billion in 2011, a YoY increase of 19 percent. However, total spending on the healthcare sector increased 26 percent YoY, from SR68.7 billion in 2011 to SR86.5 billion in 2012. This represented 12.5 percent of the total budget in 2012 compared to 11.8 percent in 2011. Based on various data points from the ninth development of the Saudi government (covering the period 2010-2014), social and healthcare investments account for 19 percent of the total budgeted expenditure, equivalent to approximately SR274 billion. In the ninth development plan, the government aims to achieve a hospital beds-to-population ratio of 3.50 beds per 1000 population by 2014. In order to achieve this target, 41,603 beds must be added between the public and private sectors to reach a total of 97,535 beds from the current level of 55,932 beds. In 2010, private sector beds represented 22 percent of the total bed count in Saudi Arabia. “Going forward, we are expecting this percentage contribution to increase. Our analysis currently assumes an 8 percent growth in the number of public hospital beds and a 13 percent increase in private beds in 2012. This takes our forecast to 83,674 beds between the public and private sectors to be added by 2014. This is an increase of approximately 32 percent from the 63,939 beds in 2011,” Miah said. The NCB Capital report highlights that the government of Saudi Arabia has emphasized investment into the public healthcare sector as one of its key aims. However, given the demand factors described above, NCB Capital believes the role of the private healthcare sector will remain vital to the health sector in Saudi Arabia. Over the last decade, the proportion of outpatient visits occurring at private facilities has increased from 19 percent to 30 percent. Although this trend may slow down going forward given the government's investment into the public sector, we believe the private sector will continue to play a vital role in the provision of healthcare in Saudi Arabia. Against this backdrop, NCB Capital, the GCC's leading wealth manager and the Kingdom's largest asset manager, initiated on Mouwasat with an Overweight rating and a PT of SR61.2, indicating an upside of 2 percent. NCB Capital believes that the low healthcare penetration, favorable demographics, and the expansion into new hospitals supports NCBC's positive outlook on the company. Mouwasat is one of the leading providers of medical services in the Eastern Region, in a sector which is expected to grow at a CAGR of 16.8 percent by 2017. Mouwasat stock currently trades at a 2013E P/E of 12.6x vs. its peer global average of 10.6x; and NCB Capital believes the premium is justified given the growth outlook of the company. Given its reputation amongst blue chip companies such as Aramco and SABIC, in addition to the country's growing population, increasing life expectancy, and the rising occurrence of chronic illnesses, NCB Capital believes Mouwasat is well positioned to grow in the coming years. “Mouwasat is planning to open a 175 bed hospital in 2013E in Riyadh, a 250 bed hospital in 2016E in Al-Khobar and expand its Jubail facility by doubling its inpatient capacity with the addition of 115 beds,” said Farouk Miah, Head of Equity Research at NCB Capital. “The new hospitals and the expansion of the Jubail facility will add 47.6 percent to the current capacity in terms of beds and 35.0 percent in terms of outpatient clinics. We believe these facilities will be the major driver behind the CAGR of 13.2 percent in revenue and 13.0 percent in net profit which we expect at Mouwasat in the coming five years.” Despite any macro slowdown in Saudi Arabia, the healthcare sector will be impacted less than cyclical areas due to the inelastic nature for the demand of healthcare services. Coupled with this downside protection, the growth outlook for the healthcare sector is significant given the demand drivers present and the insufficient supply currently available. This creates an attractive bull-bear scenario for Mouwasat. NCB Capital believes the planned addition of 540 beds (a 47.6 percent increase to the current capacity) in the coming four years, is a major catalyst for Mouwasat. Management is planning to open a new hospital in 2013E with 175 beds and a new hospital in 2016E with 250 beds. Additionally, it is aiming to double the capacity of the Jubail hospital through the addition of 115 beds.
Given the strong demand for quality healthcare in Saudi Arabia, the lack of supply and the experience of Mouwasat, NCB Capital believes these new hospitals will perform strongly. NCB Capital believes a key strength of Mouwasat is its strong and long standing relationships with major Saudi companies such as Saudi Aramco, SABIC, the General Organization of Social Insurance (GOSI) and Saudi Electricity (SEC). Given the blue chip nature and strong brand of these companies, NCB Capital believes this will act as a strong signal to potentially attract further blue chip companies and individual patients to the medical facilities offered by Mouwasat. This in turn will increase the company's revenue stream, and therefore positively impact the stock. — SG
