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Turkish healthcare 2020 outlook: Deleveraging continues

As the high inflationary environment gradually fades away, coupled with a better domestic economic outlook, we expect 2020 should be a much stronger year for the sector in terms of number of patients and margin performance

Turkish healthcare 2020 outlook: Deleveraging continues

Deleveraging was the focus for the management teams of the Turkish healthcare companies under our coverage in 2019

 

We expect this trend to continue, which should bode well for stock price performances in 2020. As the high inflationary environment gradually fades away, coupled with a better domestic economic outlook, we expect 2020 should be a much stronger year for the sector in terms of number of patients and margin performance.

After cutting our risk-free rate assumption (from 15% to 13%) and rolling our valuation to 2020-end, we increase our 12-month TPs for Medical Park (MPARK) to TRY26.0 (from TRY20.9) and for Lokman Hekim (LKMNH) to TRY8.8 (from TRY6.8). We maintain our BUY ratings. MPARK remains one of our top picks in Turkey and the EMEA healthcare space.

Operational performance outlook is much stronger in 2020

Sector players are optimistic about another adjustment in Social Security Institution (SSI) prices; however, we reckon it is less likely in 2020 given the constraints of the government budget. If it happens, that would be a big positive surprise for all private players. Even without any price adjustment, we expect MPARK and LKMNH to deliver strong (+25% YoY) EBITDA growth in 2020, while enjoying lower interest rates, which should reflect as robust positive bottom-line performances.

 

MPARK is our top pick

MPARK has successfully passed on cost inflation to patients, while increasing its in patient and outpatient visits, thanks to its strong brand recognition and robust medical tourism business in 2019. Considering the steady upsurge in the number of people with top-up insurance (which grew c. 40% YoY in 9M19), rapidly growing FX denominated medical tourism revenues, expected inorganic expansion in the hospital portfolio and the ramp-up of new hospitals, we expect MPARK to deliver another strong operational performance in 2020. With no major capex in sight, deleveraging should persist, accompanied, in our view, by a re-rating of MPARK’s trading multiples.

Despite its c. 40% share price performance in dollar terms over the past 12 months, we believe the company’s current market valuation is unwarranted and provides an attractive entry point. We consider it to be one of the most attractive blue-chip healthcare providers in our EMEA coverage universe, trading at only 7x 2020E EV/EBITDA and implying a more than 50% discount to global peers.

 

 

 

LKMNH is also a BUY

LKMNH was slow to adjust its prices at the beginning of 2019 and experienced slower patient traffic. Yet, the value-accretive rental of Ankara Hospital to Lokman Hekim University and the ongoing ramp-up of Akay Hospital should reflect a much stronger top-line and EBITDA performance in 2020, in our view. With interest rates declining rapidly post the Central Bank of Turkey’s rate cuts, LKMNH should enjoy lower financial costs during the year, which, in our view, would also pave the way for an acceleration in the long-awaited capacity increase plans for its existing hospitals.

Owing to higher EBITDA generation, we expect LKMNH’s leverage to also decline (from 3.9x in 2019E to 2.9x and 2.1x in 2020E and 2021E, respectively), which would be a strong catalyst for the stock price performance in 2020, in our view.

 

Excerpt from the Renassiance Capital sector report with the same title

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