No sign of slowdown for high-flying NMC

The Middle East healthcare market is primed for growth. The United Arab Emirates (UAE) – NMC’s largest jurisdiction – is currently worth around $13bn (£9.4bn) and is growing in the high single-digits, largely due to population trends. The introduction of mandatory health insurance in Dubai in March 2017 – which trebled the size of the Emirate’s insured population – is also expected to speed up the growth of the industry. When Abu Dhabi rolled out similar regulation in 2008, doctors' visits rose tenfold.

It’s true, capitalising on these trends is not going to come cheap. In the first half of the 2017 financial year, capital expenditure was $23m, split between new projects and further investment in existing facilities. In addition, the group acquired $100m-worth of land and buildings from Gulf Medical Projects. And, since 2014, the company has been shelling out large amounts on acquisitions, too.

However, there is sound logic behind this spending. The acquisition strategy, in particular, looks well suited to NMC's aim of expanding outside of the UAE and increasing the number services it offers. To that end, the group announced earlier this week that it would buy a 70 per cent stake in cosmetic surgery specialist ComeSurge for $170m along with an 80 per cent stake in Al Salam Medical Group for and initial $37m, giving it two clinics in the attractive Riyadh market. At the same time, NMC announced a new operating and management contract with Emirates Health, which extends the group's reach into Egypt. While not reflected in the numbers in the accompanying table, broker Investec said it expects to increase EPS forecasts by between 8 and 10 per cent as a result of these deals once it updates its models.

NMC has the balance sheet strength and financial backing to sustain its current expansion programme. Berenberg expects the group to have finished 2017 with net debt equivalent to 2.8 times adjusted cash profits. Were NMC to have stopped spending on growth at that point, the balance sheet could potentially have been in the black by 2021 thanks to the group’s ability to generate cash from operations. In the 2017 financial year, net operating cash inflows are expected to have hit $249m (91 per cent of adjusted operating profit), up from $176m in the previous financial year.

What's more, the group enjoys the support of very deep-pocketed management. In December, chairman Mark Tompkins spent £900,000 on shares. The group’s two acquisitions in January were part-financed with the issuance of shares to medical director Dr Michael Fakih. And founder and vice chairman Bavaguthu Raghuram Shetty (who recently stepped down as chief executive) retains a 23 per cent stake in the company.

NMC is by no means alone in identifying the attractiveness of the Middle Eastern healthcare market. Many operators – with similarly supportive management – have also been investing in new hospitals in the past few years. But NMC’s sensible decision to focus on specialist, underserved services means it should have protection from competition. The group operates five major speciality hospitals which offer services such as neurology, maternity and long-term home care. The largest speciality hospital – the NMC Royal in Abu Dhabi – only opened in 2015 and, as it matures and fills more beds, could double the adjusted cash profits of the entire healthcare division (72 per cent of revenues and 99 per cent of adjusted cash profits) by 2024.

The group also owns a pharmaceutical distribution business (30 per cent of revenues and 1 per cent of adjusted cash profits) which has very high barriers to entry due to the compensation drugs suppliers are forced to pay if they switch their distribution partners. Customers including Unilever, Pfizer and Sanofi are all therefore very sticky. Revenues in this division are expected to grow by roughly 10 per cent a year from 2018, while cash profit margins will hover around 11 per cent.