GEM Healthcare or the Healthcare Before Christmas: Lokman posts strong growth (EMEA)

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Eastern region now makes up 40% of sales

Van hospitals have reported yet another strong quarter, the number one take-away from September financials. Pace of growth at both Van and Van Hayat hospitals continue to outstrip rest of the group. Combined revenues in Van now make up 40% of sales, up from 35% same period last year.

Income statement - EBITDA grew 34% in the 9 months to September

The 9M15 financial statements report improvement at most P&L lines on year-on-year comparisons. Below are the key take-aways in bullet point form.

  • Van region continues to benefit from increasing capacity usage and reports high double-digit growth in sales: the revenue growth in the region in the 9 months to September reads 34.3%. 
  • In comparison, revenue growth at Ankara hospitals was modest over the same period (+11.7% at Ankara Etlik, and +4.1% at Ankara Sincan).
  • The healthcare services business overall generated TL99.3M in 9M15 sales revenues, up 16.4% year-on-year while consolidated group sales, which includes non-core businesses, reads TL102M (+10.4%).
  • 9M15 cash gross income, EBITDA and EBIT grew 33.8%, 34.3%, and 62.2% YoY, respectively.
  • At TL12.1M, the 9M15 EBITDA exceeded EBITDA generated in full year 2014.
  • At TL3.0M, net income available for shareholders was up 123%.

Balance sheet - improvement in net debt

Lokman also reported marked improvement in its September balance sheet, in particular the leverage metrics. With strong cash generation and paying down and/or extending the maturities of short term debt, the management reduced the balance sheet net debt position by cTL3M (10%) since the start of the year. Net debt to EBITDA read 2.67x as at September 2015, down from 3.45x on 31 December 2014. Net debt to equity declined to 0.46 in from 0.54 in the 9 months to September.

Outlook - room for further gains from operating leverage in Van and Sincan

We expect both pricing and in-patient sales at the flagship Sincan hospital to return to double-digit growth to catch up with the Group in 2016. We foresee double-digit growth in revenues at all 4 hospitals next year. We predict EBITDA margin to widen driven by both increased CUR at Van hospitals and growth in revenues per bed at Sincan. Recovery in net debt position should continue in December quarter and into 2016 assuming no acquisition.

Enterprise value comparables

Enterprise value (EV) based debt management ratios are also down on year-to-date comparisons. We calculate EV (equity market capitalization plus net debt) to 2015 sales ratio at 0.5x using 16 December 2015 market values. EV/EBITDA multiple reads 5.0x. These two multiples are below the industry norms. The comparable EV/Sales multiples at Life Healthcare Group and Al Noor Hospitals are 2.8x and 3.3x, respectively. On EV/EBITDA, we see Life Healthcare at 10.1x versus Al Noor's 16.5x.  The caveat here is that both Life Healthcare and Al Noor operate larger hospital networks, which generate richer EBITDA margins. It is hard to find a direct comparable for Lokman on the basis of scale of operation and network.