GEM Healthcare - Lokman finished the year on a high note, EBITDA jumps

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Strong growth and solid margin gains in December quarter

Lokman finished the year on a high note with pace of revenue growth accelerating and margins widening. The December quarter sales grew 24.0% over the same quarter in 2014 and 18.3% sequentially. Sales growth was driven by growth in inpatient admissions at Van hospitals, recovery in patient traffic at Sincan Hospital in Ankara, and increasing share of value-added services. Lokman also reported significant improvement in its margins with 4Q15 EBITDA margin widening by 394bp on the year (+179bp QoQ). Margin gains are due to output gap narrowing as operating leverage at Van hospitals continued to work to Lokman's favor. Increasing capacity usage particularly in new maternity and intensive care units, which became operational from 2Q15 boosted profitability. Also important for margin growth was the increasing share of inpatient admissions for treatment in total revenues. Lokman also benefited from improved pricing power with its suppliers. Indeed, cash cost margins declined in 2015 as scale of operation grew particularly in Van. Van hospitals had their best year since their acquisitions.

Full year results also show a strong turnaround

Lokman Hekim operated 4 hospitals in Turkey and an imaging center Iraq in 2015. The group employed 169 physicians as at 31 December 2015 versus 168 in 2014. The headcount total stood at 1,484 in 2015, up from 1,423 in 2014. Ankara hospitals contributed 60% to healthcare services revenues while Van region hospitals generated 39% of sales. The remaining 1% is generated in Erbil, Iraq.

Income statement highlights

The financial statements for the full fiscal year ended 31 December 2015 show improvement at most income statement lines on year-on-year comparisons. Below are the key results and take-aways in bullet point form.

  • The healthcare services business overall generated TL136.8M in sales revenues in 2015, up 18.4% year-on-year while consolidated group sales, which includes non-core businesses (3.3% of total), came in at TL141.6M (+13.3%).
  • ARPIA, average revenue per inpatient admission, grew 9.4% year-on-year while average revenue per outpatient treatment grew 5.8% on the year.
  • Cash gross income earned in healthcare services business is TL25.0M (+48.4% YoY), consistent with a profit margin of 17.7% versus 14.1% in 2014.
  • The sizeable improvement in cash gross margin is due to a combination of reasons. Three trends are worth highlighting: (1) growing share of inpatient admissions in overall revenues, up from 55.5% in 2014 to 58.6% in 2015, (2) increasing share of self-pay and PMI in sales: 35.1% in 2015 versus 29.8% in 2014, and (3) a marked decline in the contribution of consumables and medical supplies to cash cost of sales. Consumables cost margin came in at 23.1%, significantly below 26.3% reported in 2014.
  • Healthcare services EBITDA in 2015 is TL16.1M (+66.6% YoY) with a profit margin of 11.8%, up from 8.4% in 2014.
  • At TL5.4M, net income available for shareholders grew more than 4x year on year.
  • Key profitability metrics and performance indicators for the healthcare services business are as follows: Cash gross margin: 17.7%, EBITDAR margin: 15.5%, EBITDA margin: 11.8%, ROE: 8.8%, ROA: 4.0%.
  • Bridge from revenues to pre-tax earnings is as follows: Sales +100, Staff cost -51.2, Consumables -23.1, Rent -3.3, OPEX -5.9, Depreciation -5.6, Financing -2.4

Balance sheet - improvement in net debt

  • Lokman Hekim also reported marked improvement in December 2015 balance sheet, in particular the financial leverage metrics.
  • With strong cash generation throughout the year and paying down and/or extending the maturities of short term debt, the management reduced the net debt position by cTL3M (10%) on year on year comparison.
  • Net debt to EBITDA reads 1.7x as at December 2015, down from 2.8x on 31 December 2014. Its net debt to EBITDA ratio puts Lokman closer to the lower end of the range we see in the industry: 1.5x to 3.4x. In terms of EV/EBITDA (2015), Lokman is at the bottom of the sector range of 5.1x to 27.6x.