Think of investing in the Middle East, and your thoughts probably turn to oil. But healthcare could be an even greater opportunity. With rising junk food consumption, a climate not conducive to outdoor activity, and an ageing population, the fundamentals are terrific in a grim sort of way.
Consulting group Frost & Sullivan expects double-digit growth in the healthcare market in the Arabian Gulf between 2010 and 2018, with the United Arab Emirates (UAE) set to grow by 16.6% a year from $5.9bn in 2009 to $10.9bn by 2013. Here, demand is being spurred by government action to boost private-sector involvement in the sector, along with new laws in Abu Dhabi and Dubai which require citizens to have compulsory medical insurance.
This is all good for NMC Health. NMC operates four private hospitals, one day-care centre and eight pharmacies across the Emirates. In its first half, sales grew by 8.4% to $238m, driven by higher patient volumes and better occupancy rates (up to 60.3% from 51.6% a year earlier).
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NMC Health (LSE: NMC), rated a BY by Deutsche Bank
In April, NMC raised $168.1m when it listed in London at 210p a share. This is being used to build new sites. The Brightpoint maternity hospital and Mussafah day-patient facility in Abu Dhabi should open in December. A hospital in the Dubai Investment Park (DIP) is slated for early 2013, and up to $200m is allocated for a development at Khalifa City to be tendered this year.
NMC has also established a specialist distribution business (28% of EBITDA earnings before interest, tax, depreciation and amortisation) that extends beyond medical products to cover consumer goods, food and educational equipment.
Deutsche Bank forecasts 2012 turnover and earnings per share (EPS) of $496 and $0.29 respectively, rising to $562m and $0.39 in 2013. On a sum-of-the-parts basis, I would value the healthcare unit on a ten times EBITDA multiple, and the distribution unit on a six times multiple. After adjusting for net cash of $24.8m, I get a value of around 245p a share.
In terms of risks, the Gulf is of course a geopolitically volatile region. Also, government reimbursement rates are falling, and there's only a free-float of 30%, which means the founders hold most of the voting power, which could impact minority shareholders. That said, the shares are at a hefty 25% discount to my fair value, and NMC should benefit from the secular growth in healthcare across the UAE. Deutsche Bank has a price target of 318p.
Rating: BUY at 190p (market cap £355m)
Paul writes the Precision Guided Investments newsletter. See moneyweek.com/PGI or call 020-7633 3634.
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