GEM Healthcare - Lokman Hekim: Merits of Etlik expansion

Capacity investments in Etlik to go ahead

Lokman Hekim management is contemplating capacity investments in Etlik, Ankara. Etlik remains the most profitable hospital across the network of hospitals Lokman operates. It has long become clear that Etlik needs a major upgrade. The property adjacent to the location in Etlik has become available where the management is looking to build the additional capacity. We believe the planned capacity expansion and upgrade in Etlik would enhance margins, earnings and create value for shareholders.

Etlik - Strong brand recognition

Etlik is Lokman's first hospital. In fact, Etlik, which opened to business in 2002, was company's only hospital until 2008, the year Ankara SIncan became operational. The brand recognition in Etlik is well-established. Lokman is a trusted neighborhood hospital with a strong track record of delivering service quality and customer satisfaction.

Etlik - the highest sales per square meter

Space at Etlik Hospital is scarce. If you visited the location, the first thing you notice would be a crowded hospital lobby. You see patients trying to register with the reception or locate the very physician they are looking for. You cannot find a single Lokman employee idle. The rooms are always occupied. Here is what these mean in terms of numbers. Etlik operates on 2,900 SQM of floor space (7.4% of the group as a whole) or 37 beds (7.3% of the group’s bed capacity). On these, Etlik generated 20.2% of sales of Lokman group in 2015, which makes the location nearly three-times more profitable than the group average. We are using full year 2015 numbers to exclude Akay and Demet, which became operational late 2016.

Etlik - PPP hospitals are no competitors

The notion that the ongoing PPP projects would hurt Lokman's business in Etlik is preposterous. The PPP projects are to build large state hospitals to serve the larger population, not Lokman's market. So we see little relevance there. Etlik is, in fact, the case in the point. Etlik is running at full capacity as it always has, with our without state hospitals in the district. The state hospitals are actually source of positive surprise to Lokman because the government is sourcing out the services. There is no medical service capacity, nor is there a compensation regime in place to attract quality personnel to man these colossal PPP buildings. So hospitals like Lokman should actually benefit from these "upgrades" at state hospitals. Again let us not forget these are, after all, STATE hospitals where Lokman does not compete.

March quarter - Lokman's second best EPS on record 

March quarter of 2017 was one of Lokman's best quarters on earnings - 1Q17 EPS was indeed the second best on record. Revenues registered 40% growth year-on-year as the recent acquisitions started showing up in numbers. Average revenue per visit has also set a record as the contribution of PMI and cash patients increased. Capital ratios remain strong with leverage looking healthy across all metrics we monitor. Overall, Lokman is on track to meet the full year guidance. 

Lokman Hekim has so far bought back 1,280,353 shares or 5.33% of share capital. as of 13 June 2017.