JKSB updates prospects on healthcare sector

John Keells Stock Brokers (JKSB) has released an update on the prospects on the healthcare sector focusing on two stocks – Lanka Hospitals and Nawaloka Hospitals. Here are excerpts from the brief analysis.

Lanka Hospitals

Built by the Indian based Apollo Group and commissioned in 2002, Lanka Hospitals went through two changes of ownership. The first in late 2006, was when the Distilleries group, through SLIC bought over 80% at Rs.28.00 per share. The second happened due to the re‐nationalisation of SLIC by the Government.

The property was initially designed for 300 beds and is expandable to 500 beds. The hospital was built with a split between wards and single beds that skews significantly higher to wards as compared to the norm for premium Colombo based private hospitals. An initiative to expand capacity by utilising these areas is underway. The large majority of LHCL’s revenue can be classified as inpatient, with the key revenue drivers being Cardiology and Pediatric Cardiology. The company also has a successful IVF Fertility Centre and renal science department. LHCL previously offered a predominantly resident team of medical specialists. However, since the change in ownership, the management has decided to shift the resident/visiting doctor model and invited more outside specialists to practice which has led to an uptick in OPD consultations. A rights issue concluded in December 2007 which raised Rs.1bn cleared the way for the company to achieve a new level of profitability. However the hospital is probably due for a new round of capex in order to refurbish facilities. The change in ownership has led to an expansion in the hospital’s offerings with lower cost surgery packages now being offered as well as targeting medical tourism in a big way, along with cosmetic surgery. The longer term intention is to establish a chain of hospitals under the Lanka Hospitals brand.

Lanka Hospitals has made Rs.64.3m in net earnings for the quarter to September 2010 which when annualised is an EPS of Rs.1.15. At its current price of Rs.36.50 the share trades at a multiple of 31.7x

Nawaloka Hospitals

Having started with 100 beds 25 years ago, the hospital which recently built a new wing currently has a bed capacity of 405 along with 85 consultation chambers and 13 operating theatres. The new complex has added 100 new rooms on eight floors and each floor area is 10,000 sq.ft. The capacity expansion cost approximately Rs.1.5bn. Of the 13 operating theatres two are dedicated for out patients’ needs while another two will be dedicated for obstetrics and gynecology. We estimate Nawaloka has 15% of the diagnostic laboratory market behind market leader Asiri who has 40%. The lab facility has focused on positioning itself as the high‐end referral laboratory in Sri Lanka with a tertiary central laboratory at the Hospital’s Colombo centre. Nawaloka’s investments in cardiac catheterisation lab facilities which facilitates angioplasty and stenting procedures has boosted heart procedure volumes. A 64 slice CT scanner for cardiac evaluation was also part of the capacity expansion while Rs.60m was spent on revamping their ICU facilities. Nawaloka will also construct a multi‐storey car park in FY Mar 2011, at a cost of Rs.150m. There are also plans to set up a clinic network offering outpatient and pharmaceutical services within the next few years; these will be primarily established in rural areas.

In August 2005, Nawaloka bought a 24 percent stake in the 446 room Galadari Hotel. The investment proved a white elephant, bringing earnings under strain. In May 2010, Nawaloka sold this stake, for Rs.1.36 billion. Like its peers, Asiri and Durdans, Nawaloka is currently operating at full strength. Whilst revenue has increased by a CAGR of 13.2% from FY07 to FY10, operating margins have hovered around the 11.5‐12.0% level. We expect the new wing will boost revenue by more than the almost 25%increase in capacity due to pricing effects and premiums to be charged on the improved facilities. Nawaloka has made Rs.87.8m in net earnings for the quarter to September 2010 which when annualised is an EPS of Rs.0.25. At its current price of Rs.3.90 the share trades at a multiple of 15.6x.