GEM Healthcare - Lokman reports recovery in EPS with risks now to the upside

September quarter results beat estimates

Lokman Hekim has posted sequential improvement in earnings in its September quarter financial statements. The earnings available for shareholders read TL1.6M versus a net loss of TL0.8M reported in June quarter. Revenues, cash gross income and EBITDA grew by 30%, 23% and 40% over the same period last year, respectively.

Ankara Sincan hospital leads the growth in admissions, both inpatient and outpatient. Improvement in occupancy rates at Ankara Akay, acquired last year, also boosted group sales. We calculate the EBITDA margin for the quarter at 13%. The margin would be above 18% mark if Ankara Akay and Demet investments were excluded.

As for the balance sheet, the debt levels have increased with the new roll-out and room upgrades at Akay. Net-debt to EBITDA is 2.03x versus 1.75x as at December 2016 but remains well below industry norms and 5-6x reported by Lokman's larger competitors in Turkey.  EBITDA also has some catching up to do as there is still sizable slack in the business and operating leverage to benefit from.

We reckon margins in 2018 will widen as more of Ankara Akay joins rest of the group. We would not be surprised if Lokman produced TL300M in group sales with 15%+ EBITDA margin next year.

Compelling valuation

The shares are trading around 5x on 1YR forward EV/EBITDA or on an earnings multiple probably below 10x mark. Lokman's 1YR forward PER is also, and unjustifiably, below that of Borsa Istanbul. In contrast, Lokman's emerging market comps are currently valued well above 10x on EV/EBITDA while their PER-based market relatives range between 1.5x and 1.9x. We would expect Lokman's share price to move to narrow the valuation gap next year.