Saudi privatisation push fortifies healthcare companies

• 11 listed companies analysed
• Profits have risen for 10 of them
• Government policy drives growth

The revenues of listed Saudi healthcare companies should rise more quickly than the broader stock market thanks to government efforts to increase the private sector’s involvement, analysts have said.

Nine-month profits have risen for 10 of the 11 companies analysed by AGBI, with eight posting increases of at least 10 percent. Almoosa Health was the outlier, reporting a near-halving of its net profit.

Yet the 11 companies’ stock price performance has been mixed. Over the 12 months to January 26, five fell – by an average of 16.5 percent. The six gainers rose by an average of 12.6 percent.

This is partly down to the healthcare sector’s expensive valuations. The 11 companies trade at an average trailing price-to-earnings ratio of 42.4, according to AGBI calculations, which is more than double the Saudi exchange’s ratio of 18.7.

“Healthcare profitability and revenue growth has been much higher than the wider market over the past few years and that will continue for the next few years also, so the valuation premium is justified,” says Asmar Hamoodi Shams, a senior analyst at BSF Capital in Riyadh.

“However, valuations have been a key concern from some investors when it comes to recent healthcare IPOs, despite the high over-subscription levels.”

Basma Adeem completed a SAR17.6 million ($4.7 million) initial public offering last week. Also known as Smile Care, the dental company will list on Saudi Arabia’s Nomu market for small companies. Its IPO was about 20 times oversubscribed.

On the main market, Dr Sulaiman Al Habib Medical Services Group is by far the largest listed Saudi healthcare company. Its market capitalisation stands at $27.2 billion. The average for the remaining 10 is $2.6 billion, according to AGBI calculations.

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The medium-term outlook for Saudi healthcare companies “is positive”, says Shams, citing government policy, increasing demand and listed companies’ resulting expansions as drivers for growth.

The government initiatives include increasing bed density per capita, which would require adding an estimated 20,000 hospital beds, as well as targets for the private sector to account for 45 percent of healthcare spending by 2030 and for all Saudi nationals to have private medical insurance.

Saudi Arabia’s rising population and the prevalence of lifestyle-related diseases such as diabetes are also having an impact.

“We have a very positive revenue growth outlook for major listed healthcare companies,” says Chiro Ghosh, vice president for financial institutions at Sico Bank.

“The government push to increase insurance penetration [will] see more residents moving to private sector hospitals. Over the medium term of 1-2 years, we see a healthy upside for stocks.”

Many Saudi healthcare companies have relied on bank borrowing to fund their expansion, so the rise in interest rates from near-zero in early 2022 to two-decade highs in late 2023 has raised their financing costs significantly, Shams says.

Government and government-related organisations tend to take longer to clear their dues than insurers, so healthcare companies that rely more on the former often resort to short-term borrowing to manage working capital. As a result, rising interest rates have affected them to a greater degree, says Shams.

“The key risks are potential delays to companies’ expansion of their hospitals and other healthcare facilities, the possibility that interest rates will remain elevated and increasing competition as players expand within the same cities or districts,” he adds.