Karachi November 11, 2021: Insight securities Muhammad Shahroz has published research note on Shifa International Hospitals Limited with a buy recommendation and Dec22 DCF based Target price PKR267/sh. Our stance is backed by upcoming facilities, which will start contributing in the next 12 to 36 months. To recall, Shifa International Hospital suffered significant losses during COVID induced lockdowns. However, company’s profitability witnessed significant improvement in last 3-4 quarters due to reopening of OPD services and resumption of deferred treatments and surgeries.
This is not the first time Insight Securities has written report on Shifa International Hospitals Limited. Insight has initiated its coverage of SHFA in July 2020 when stock was trading at PKR264 and Insight gave Target price of PKR335 for June 2021. It is worth mentioning to note that Insight then published another report on 19 November 2020 with a target price of PKR278 at a time when stock was trading at PKR200.
Company’s revenue has recorded 5 year CAGR of ~10.2%, thanks to significant contribution from outpatient and pharmacy segment. The management of SHFA has been working on multiple projects. We opine that addition of new and specialized facilities could bode well for company’s profitability and unlock value.
We maintain our BUY stance on SHFA having Dec’22 TP of ~PKR267 providing upside of ~36%. Our liking is based on following propositions i) Resumption of OPD operations, ii) Upcoming new facilities, iii) Enhanced focus towards telehealth and healthcare management solutions iv) Globally certified facility, and v) Ever expanding business model with steady cash generation. Key risks to our investment thesis include i) Delay in projects commissioning, ii) Lower than expected occupancy rate, iii) resurgence of COVID, resulting in lockdown and OPD closure, iv) PKR devaluation, v) Changes in regulatory framework and vi) Lack of skilled resource.
Market with attractive dynamics
Pakistan is a developing country with rising population and income inequality. Pakistan’s basic healthcare infrastructure is inadequate for meeting the demand of its large population. As per estimates, private sector accounts for ~80% of all outpatient visits. In Pakistan, federal and provincial budget allocation for healthcare services is negligible given the population of the country. The share of public sector expenditure is very low in Pakistan and this situation has created a huge gap that is filled by private sector hospitals. As per World Health Organization, Out Of Pocket Spending (OOPS) as percentage of total health expenditure for Pakistan hovers around 60%-65%. Rising population and rapid urbanization creates immense potential of growth for the private sector healthcare service providers
Upcoming projects to fuel growth
Managements of SHFA is actively working on different expansion projects and they are targeting to grow its assets from ~PKR17bn to ~PKR30bn in next 3-5 years. Currently, company is actively working on three major projects; i) Shifa National Hospital Faisalabad Pvt. Ltd, ii) Shifa Medical Center Islamabad Pvt. Ltd and iii) Shifa Neuro Sciences Institute Islamabad.
Shifa Neuro Sciences Institute Islamabad Pvt. Ltd (SNSII)
Company is working on Shifa Neuro Sciences Institute Islamabad which is Pakistan’s first state-of-the-art center of excellence. SNSII is a specialized facility which will provide Neurology and other ancillary services. Shifa Neuro Sciences is 100% owned subsidiary of SHFA. Currently, neurology facility is located in H-8/4 Islamabad. Post commissioning of Neuro Sciences Institute neurology and other ancillary departments will be shifted to this new facility. We believe that ROE of this project will be much higher than SHFA’s existing facilities due to its specialized and unique services. As per management, this Neuro facility will start its OPD facility in May’22 and IPD in Dec’22.
Shifa Medical Center Islamabad Pvt. Ltd
Shifa International Hospital partnered with Interloop Holdings Limited to setup an ambulatory healthcare facility in Islamabad. During FY21, ground breaking of this facility took place and management expects this facility to start its operations in next 24 months. As per initial plans, Shifa Medical Center was meant to be an ambulatory facility. However, after seeing closure of OPDs during COVID-19, management decided to setup 100 beds in this facility. Initially, the cost of this project was estimated at PKR3.5bn, however, due to surge in prices of construction material, the cost of the project has increased. Management is confident that the price escalation is under control and is at manageable levels. SHFA holds ~56% stake in Shifa Medical Center Islamabad.
Shifa National Hospital Faisalabad
During the year, company started working on Shifa National Hospital Faisalabad, which is a tertiary healthcare facility. Initially, this facility will have 250 beds which will be enhanced upto 400 beds. Shifa partnered with Interloop Welfare Trust for this project and holds 60% stake. As of now, company has acquired total land of 49.5 kanals and the project’s financial feasibility of the project has been approved. This project is expected to commence its operations in next 36 months.
Integrating IT with healthcare
COVID crisis has not only impacted health of masses but also dented many economies. The world is fighting the pandemic and embracing a new normal. Many businesses are turning this crisis into opportunity and SHFA is one of them. To mitigate the financial impact of COVID-19, company started providing digital healthcare services to its patients. This homecare facility is named, Shifa Integrated Health Technology Pvt. Ltd (SIHT). This facility is 100% owned by Shifa Foundation and there is no direct financial impact of SIHT on SHFA’s accounts. Having said that, we believe that the indirect impact of this project will be significant as it will help SHFA in generating customer leads. Post COIVD pandemic, global telehealth market is growing rapidly and SHFA can effectively utilize SIHT to increase its reach, which will help them to scale their business.
Another such project which can be a game changer for SHFA is healthcare management solutions. Under the banner of Shifa CARE Pvt. Ltd (an associate), company is in process of developing globally recognized Electronic Medical Records (EMR) and Electronic Health Records (EHR) solutions. SHFA owns 50% stake in Shifa CARE Pvt. Ltd; with total investment of PKR250mn. Currently, these solutions are in development phase and few of the modules are currently live in SHFA facilities. As per our interaction with management, SHFA is one of the first local company that are working on development of these solutions. With rapid digitalization, demand for these solutions are on the rise and SHFA is preparing to tap on these opportunities in both local and export markets. Furthermore, these solutions are generally based on periodic fees, which may help SHFA in secure recurring revenues.
Trading at attractive multiples
SHFA is currently trading at steep discount on earning multiples, stock is trading at TTM P/E of ~12.5x and forward P/E of 10.8x. As per the data of few regional companies, the average P/E ratio clocks in at ~40x. Hospital business is often considered as source of stable revenue stream with steady cash generation and SHFA is only listed hospital in PSX. Furthermore, we opine that, reclassification of Pakistan’s into MSCI Frontier Market will possibly attract foreign flows in SHFA.
