SC Securities Pvt Ltd SC Research

NAWALOKA HOSPITALS (NHL)

Price/Vol. Movement Recommendation:
BUY
5.0 70000

volume (000's)
price(LKR)

4.5
60000
4.0
3.5 50000

3.0
40000
2.5
2.0
30000
NHL.N: LKR.4.00
1.5 20000
1.0
0.5
10000 Top 5 shareholders as at 30th November 2014
0.0 0
Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14
Major Shareholder % Holding
Mr. H.K.J. Dharmadasa 32.69
Nawaloka Construction Company Ltd 31.34
Investment synopsis Dr. T. Senthilverl 21.86
National Savings Bank 1.26
Nawaloka Hospitals (NHL) is one of the largest private sector healthcare operators in Ms. A.G. Dharmadasa 0.36
Sri Lanka. It has a 400+ bed hospital located in the centre of Colombo city, with
convenient access to major roads connecting Colombo to its suburbs. NHL is in the Share Info
process of building a small (50+ bed) hospital in Negombo, in close proximity to the
main Negombo public hospital. HNL also has plans to expand its OPD facilities and MKT Cap (LKR b) 4.6
construct a multi-story car park at its hospital premises in Colombo.
We expect the private health care industry to show secular growth over the medium Issued share (b) 1.4
on the back of increasing income levels and urban middle class population growth.
Increasing prevalence of non-communicable diseases, increase in health insurance NHL vs ASPI
coverage and the expected increase in expatriate population should also be key
short-medium term growth drivers for the private healthcare sector. Given that 5.0 9,000
4.5 8,000
investment in public healthcare facilities by the state has generally seen a decline 4.0 7,000
over the last decade (1.85% of GNP in 2004 to 1.2% of GNP in 2012); the urban 3.5 6,000
3.0
middle class is increasingly turning to the private sector for convenient and timely 2.5
5,000
4,000
medical care. Moreover public health care spending is to large extent focused on 2.0
3,000
1.5
meeting recurrent expenditure in the sector. Frequent trade union action by staff in 1.0 2,000

state healthcare sector is also another factor for the affluent and urban middle class 0.5
0.0
1,000
-
to seek treatment at private hospitals.
Nov-12

Jan-13

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Nov-14
We expect NHLs revenue to grow by a 2014-16 CGAR of 11% with EBITDA margins
expected to over in the 15%-16% range. We expected OPD volumes to grow by a NHL SL ASPI

modest 2% in FY15P, but increase by 10% in FY16P on back of increased capacity

coming online from the Negombo project and expansion at NHLs Colombo hospital. Source: Bloomberg
We expect in-ward admissions to increase by a 2014-16 CAGR of 7%. We expect
occupancy levels to increase to 55-60% over the medium term.
Nevertheless, we expect yield (ARPOB) to grow by a modest 3% over the medium
term on account of increasing competition. As such, over the medium term, we
expect OPD revenue to account for 55-57% of hospital segment revenue. A
concessionary tax rate of 12% coupled with expected capital allowances from major
new investments should be clear earnings drivers for NHL over the medium term
albeit with a dent from high debenture cost (cf. current rates).We expect NHLs NPAT
to grow by 2014-18 CAGR of 24%. Our DCF based valuation yields a 12 month target
price of LKR4.00 which is a c.20% upside to the current market price of LKR3.30.
BUY

Key Financial Data & Forecasts

.
Year End FY12A FY13A FY14A FY15P FY16P FY17P FY18P
Revenue (LKR m) 3,711 4,223 4,299 4,673 5,269 5,890 6,591
EBITDA (LKR m) 736 895 813 728 741 750 894
NPAT (LKR m) 271 452 209 108 110 82 167
EPS (LKR) 0.19 0.32 0.15 0.08 0.08 0.06 0.12
BVPS (LKR) 2.25 2.67 2.77 2.80 2.82 2.83 2.90
PER (x) 16.7 10.0 21.6 41.8 40.8 55.1 27.0
EV/EBITDA (x) 10.3 8.5 9.4 10.5 10.3 10.1 8.5
SC Securities Pvt Ltd SC Research

Company Background

Nawaloka Hospitals plc (NHL) was established in 1985 at its present location in Colombo city. NHL has since then,
introduced several innovations to the private healthcare sector, including being the first private hospital to introduce
CT Scanners to Sri Lanka, conducting the first heart bypass surgery, first to install a MRI Scanner etc. NHL has applied
for Joint Commission Accreditation (JCI) certification in 2014. NHLs primary hospital facility is based in Colombo
city. It has a fully-fledged inpatient ward unit with 400 beds and several operating theatres, Out Patient Dispensary
(OPD) and an in-house pharmacy. NHLs in-patient services include, Cathlabs, Cardiac Centres, ENT, Transplantation
and Maternity services. NHL also has laboratory testing services which is operated under Nawaloka Metropolis
Laboratories (Pvt) Ltd, a Joint venture with India based Metropolis Laboratories. A common feature of the Sri Lankan
medical practitioners market is that patients select which doctor (especially specialist doctors) to see, based on the
doctors seniority and reputation amongst peers. The fact that many leading doctors use NHLs channel facilities is a
key advantage for NHL. NHL is planning to construct a multi-story car park facility with 550+ slots and also provide
additional OPD channelling rooms. The estimated cost is LKR1.8-2bn and NHL plans to fund this through bank
borrowings.

NHL is currently constructing a 50+ bed hospital in Negombo, Nawaloka Medicare (Pvt) Ltd, as a fully owned
subsidiary of NHL. Though initially the cost of this project was estimated at LKR500m, the actual cost is now over
LKR1.3b especially due to the acquisition of additional land to construct a 400+ slot car park facility. This regional
hospital is to be equipped with operating theatres, diagnostic facilities, OPD, pharmacy and an ambulance service. As
this new hospital is in close proximity to the main public hospital, Doctors practicing at the latter should be able to
conveniently channel at NHLs Negombo hospital. Moreover, NHL will be able to meet the demand for diagnostic and
pharmacy services from patients visiting the Negombo public hospital, where such services are in short supply. NHL
is also said to be considering opening regional hospitals in Kurunegala and Jaffna.

Key Management:

Jayantha Dharmadasa (Chairman/CEO): has been a director of NHL since inception. Hes one of Sri Lankas leading
businessmen and counts over 37 years in executive management and over 28 years in the healthcare industry. He is
also the chairman of Nawaloka Holdings (Pvt) Ltd and several other related companies. He is the Honorary Consul-
General for Singapore in Sri Lanka. He is also a director of Sri Lanka Telecom.

Prof. Lal Gotabhaya Chandrasena (Director/General Manager): has been a director of the NHL since 2003. He has over
21 years in the hospital and healthcare industry. Currently he is the president of the Association of Private Hospitals
and Nursing Homes. Prof. Chandrasena is a Clinical Bio-Chemist by profession and has over 24 years in Academic
experience. He holds fellowship in the Royal Society of Chemistry (UK) and Institute of Chemistry (Sri Lanka) and the
National Academy of Sciences of Sri Lanka.
SC Securities Pvt Ltd SC Research

Private healthcare industry to grow as state investment in public healthcare stagnates: State investment in
health as a proportion of GDP has declined considerably and the bulk of this expenditure is aimed at meeting
recurrent expenditure. Also, Sri Lanka has set an acceptable level of basic access to health care for its citizens and
fiscal pressures have re-directed state resources to other growth objectives. Increasing urbanisation, increase in non-
communicable diseases (NCD), coupled with higher per capita GDP and an increase in the middle class have seen an
increased propensity for the use of private hospital facilities, especially among the urban and sub-urban population.
The inconvenience of long waiting times and queues at state hospitals is often cited as one of the main reason for
people opting for private medical attention, especially among urban professionals. As such we expect private health
care to increasingly play an important role in the overall provision of healthcare services in Sri Lanka.

25000

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0
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2011
Private Hospital Revenue (LKR m) Private Hospital Capex (LKR m)

Source: IHP

Increase in medical insurance has been a key driver of Private medical healthcare growth: The increased
prevalence of medical insurance, especially among salaried professionals in urban centres is another key driver of
private health care sector growth. Medical insurance benefits are increasingly used as part of employee remuneration
by Sri Lankan corporates. This partially covers for the absence of a national health insurance scheme which is
widespread in developed and other developing countries. With medical insurance cover, people who would typically
have had to seek public hospitals for OPD and surgical services are now able to get the same service from the private
sector. While medical insurance gross written premium (GWP) has been typically reported as part of Miscellaneous
insurance GWP under the General Insurance category by the Insurance Board of Sri Lanka (IBSL), recent reports by
the IBSL have shown that medical insurance accounted for over 50% of miscellaneous insurance. For instance
Medical Insurance GWP increased 18% YoY in 2013 to LKR5.9bn (LKR5.1b in 2012). We expect this to be an
important driver of private hospital demand over the medium term.

14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1997

1998

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2013

General Insurance (Miscellaneous) GWP (LKR 000's)

Source: IBSL
SC Securities Pvt Ltd SC Research

Increase in expatriate population should also boost demand for private healthcare services: The launch of
several large scale infrastructure projects by the government (e.g. Colombo port city, Colombo port expansion etc.) as
well as several big ticket commercial ventures by local corporates (e.g. Waterfront properties, Queensbury project,
several large BPOs etc.) should see an increase in foreign expats working and residing in Sri Lanka. This also is in line
with the governments initiative to make Sri Lanka, a major commercial hub in the region. This augurs well for the
private health care sector as foreign expats are usually covered by medical insurance and are more likely to opt for
the convenience and ease of using private healthcare facilities.

NHLs capacity expansion should help meet increased demand as well as tap new markets outside Colombo:
NHLs regional hospital in Negombo is its first hospital outside Colombo city. Located in close proximity to the main
Negombo public hospital, NHLs Negombo regional hospital is equipped with 50 beds, operating theatres, a
pharmacy, diagnostic facilities and an ambulance service. Given its proximity to the main Negombo public hospital,
NHL should be able to attract doctors practicing at the public hospital to also practice and channel patients at its
regional hospital. Also the availability of diagnostic and pharmacy services at NHLs Negombo hospital should attract
patients seeking such services at the public hospital where these services are in short supply. The expected
construction of a multi-story car park and additional OPD facilities at NHLs Colombo hospital should help meet
expected increase in demand.

OPD should be the key revenue driver for NHL: We expect OPD to be the key revenue driver for NHL over the
medium term. While we expect In-patient volumes to increase by c.7% YoY over the medium driven by a mix of
organic demand and decrease in average length of patient stays which should boost occupancy, in-patient yield
growth should remain at a modest 3% YoY, on the back of increased competition and substantial discounts on credit
card payments and corporate healthcare packages. We expect OPD volumes to increase by c.10% YoY over the
medium term, especially with increase in capacity at Colombo and Negombo regional hospital. We expect OPD yields
to increase by c.5% YoY over the medium term. We expect OPD share of hospital revenue to increase to c.53% over
the medium term form the current 49%.

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0
FY11 FY12 FY13 FY14 FY15P FY16P FY17P FY18P

NHL - In patient admissions NHL - OPD visits

Source: Company Data, SC

Low effective tax rate is a potential earning driver; but high debt funding cost is a sour point: NHL enjoys a
concessionary corporate tax rate of 12% (as opposed to the standard corporate tax rate of 28%) from successive
government budgets which has aimed to promote the private healthcare industry. This along with capital allowances
from new investments should help lower NHLs effective tax rate and should potentially be a significant earning
drivers. Nevertheless, the recent LKR1.5b debenture (bulk of which has a five year tenure) issue at a fixed rate of
14.15% is a sour point, especially in the current benign interest rate environment.
SC Securities Pvt Ltd SC Research

Shortage of qualified medical professionals should be a challenge to NHL as well as the industry: The critical
nature of the healthcare business as well as stringent local certification procedures places greater reliance on
qualified medical staff for all players in the industry. The recent brain drain, especially amongst qualified nursing staff
has placed a strain on the industry as a whole. While NHLs nursing training initiatives may alleviate this to some
extent, we expect staffing pressure to continue into the medium term.

NHL trades at a discount; but sector is affected by low liquidity: Based on our DCF model, we value NHLs 12
month target price at LKR4.00 (WACC-12.7%, Beta-1.3, g-5.0%) which is a c.20% upside to the current market price.
Our higher beta is an implicit adjustment for the lack of liquidity. We feel that sector valuation too has been impacted
by low liquidity. Significant downside risks to our valuation argument are: 1) LKR depreciation, which would inflate
LKR cost of FX denominated medical equipment and drugs and depress margins (Sri Lanka imports a majority of its
medical drug requirement and almost all of its medical equipment) 2) Cost-over runs at new projects which would
significantly affect our cash flow projections, funding cost and capital structure estimates.

Nawaloka Hospital (NHL) Summary Financial statement and Indicators

Income Statement (LKR m) Balance Sheet (LKR m)

Year End FY12A FY13A FY14A FY15P FY16P FY17P FY18P Year End FY12A FY13A FY14A FY15P FY16P FY17P FY18P
Revenue 3,711 4,223 4,299 4,673 5,269 5,890 6,591 Property, Plant & Equipment 3,703 4,001 4,447 4,592 5,157 5,787 5,798
Gross Profit 1,887 2,210 2,248 2,390 2,695 3,012 3,371 Leasehold Rights over Land 237 234 231 228 225 222 219
Admin & Other expenses -1,458 -1,654 -1,815 -2,082 -2,393 -2,753 -3,025 Associates, JVs etc. 765 827 1,356 1,356 1,356 1,356 1,356
Other income 30 44 65 71 78 86 95 Non Current Assets 4,706 5,062 6,033 6,175 6,737 7,365 7,373
EBIT 459 599 498 379 380 346 441 Inventories 182 258 319 411 463 518 580
Finance Cost -110 -144 -202 -275 -275 -275 -275 Receivables 229 256 352 374 422 471 527
Income from Associates 13 0 0 18 20 22 24 Other Current Assets 143 128 151 151 151 151 151
PBT 362 455 296 123 126 93 190 Cash & Short Term Investments 103 152 515 107 997 292 285
Taxation Provision -91 -3 -87 -15 -15 -11 -23 Current Assets 657 794 1,337 1,043 2,033 1,432 1,543
PAT 271 452 209 108 110 82 167
Debentures 0 0 1,476 1,476 1,476 1,476 1,476
Cash Flow Statement (LKR m) Borrowings and Leases 644 665 441 391 1,829 1,516 1,454
Year End FY12A FY13A FY14A FY15P FY16P FY17P FY18P Other Long Term liabilities 409 307 368 384 400 416 432
EBIT 459 599 498 379 380 346 441 Long Term Liabilities 1,053 972 2,285 2,251 3,705 3,408 3,362
Depreciation & Ammortisation 277 295 314 349 360 404 454 Payables 378 295 464 457 515 576 644
Net Finance cost 109 132 168 249 269 225 260 Borrowings and Leases 253 293 212 63 63 313 313
Tax paid -47 -26 -36 -15 -15 -11 -23 Other current Liabilities 508 538 506 506 506 506 506
Working capital changes -116 -226 -17 -120 -42 -44 -49 Current Liabilities 1,139 1,127 1,182 1,025 1,083 1,394 1,463
other items -94 -138 -172 -241 -239 -237 -235 Share capital 1,207 1,207 1,207 1,207 1,207 1,207 1,207
Net operating cash flow 587 637 756 602 714 683 848 Reserves 1,963 2,549 2,696 2,734 2,774 2,786 2,884
Capex -519 -448 -758 -491 -923 -1,032 -462 Share capital and Reserves 3,170 3,757 3,903 3,941 3,982 3,994 4,091
Other investing activities -48 -45 -56 0 0 0 0
Net Investing cash flow -568 -493 -814 -491 -923 -1,032 -462 Financial Ratios
Proceeds from debentures 0 0 1,476 0 0 0 0 Year End FY12A FY13A FY14A FY15P FY16P FY17P FY18P
Changes in loans and leases 213 61 -441 -200 1,437 -63 -63 GP Margin (%) 51% 52% 52% 51% 51% 51% 51%
Dividends paid -70 -70 -70 -70 -70 -70 -70 EBITDA Margin (%) 20% 21% 19% 16% 14% 13% 14%
Other financing activities -109 -132 -503 -249 -269 -225 -260 NPAT Growth (%) -75% 67% -54% -48% 2% -26% 105%
Net Financing cash flows 33 -141 463 -518 1,098 -357 -392 Asset Turnover (x) 1.0 1.1 1.0 1.0 1.0 1.0 1.1
ROE (%) 9% 13% 5% 3% 3% 2% 4%
Net cash flow 53 3 405 -408 890 -705 -7 Interest cover (x) 4.2 4.2 2.5 1.4 1.4 1.3 1.6
Free cash flow 68 189 -2 110 -209 -348 386 Gearing (x) 28% 25% 55% 49% 85% 83% 79%
SC Securities Pvt Ltd SC Research

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