Earnings Review - Q3 FY 15

29 January 2016

65, Braybrooke Place, Colombo 2, Sri Lanka

research@bartleetreligare.com, +94 11 5220200

BRS Research

The Lanka Hospital Corporation PLC (LHCL: LKR 55.00)

Up for a re-rating on higher margins in a defensive play: BUY

Head of Research - Nikita Tissera

Research Analyst - Ishanudeen Zohar

LHCL Q3 FY 2015 net profit grew 350% YoY to LKR 259mn recording an EPS of LKR 1.16. A
combination of higher occupancy coupled with cost efficiencies pushed this spike in performance. EBIT margins tripled to 16%YoY, with sliding admin expenses. GP margin was up to 58%
(from 54% YoY). Net revenue improved 14% YoY to LKR 1.4bn supported by higher inpatient
admissions during the period. The surgical unit, as the highest margin generator we believe
would continue its growth in the long run. We also believe the Govts plan to divest from the
venture would bring in some much needed liquidity to the share. Based on a free cash flow
valuation we have arrived at a target price of LKR 65 granting an upside of 18%. We upgrade
to BUY.
All figures in LKR' mn

2011

2012

2013

2014

2015E

2016E

2017E

Revenue

2,918

3,406

4,072

4,754

5,566

6,285

7,181

Revenue growth (%)

-7.6%

16.7%

19.6%

16.8%

17.1%

12.9%

Gross Profit

1,650

1,858

2,380

2,704

3,251

Gross Profit Margin (%)

56.5%

54.6%

58.5%

56.9%

58.4%

EBIT recurring

339

338

594

465

EBIT margin (%)

11.6%

9.9%

14.6%

9.8%

Profit attributable to equity holders

BRS EPS (LKR)

437

387

675

466

Trading Snapshot
Market cap (LKR mn)

12,305

Market cap (USD mn)

86

Outstanding equity shares (mn)

224

Public Holding (%) - Sep'15

16.73%

52-week High/Low (LKR)

62.50/39.50

YTD ASPI return (%)

-8.04%

14.3%

YTD Stock return (%)

-8.79%

3,727

4,271

Beta

59.3%

59.5%

897

1,154

1,346

16.1%

18.4%

18.7%

896

1,049

1,212

1.00

Valuation Summary
CMP (LKR)

55.00

Intrinsic value (LKR)

64.85

DPS (LKR)

1.00

1.95

1.73

3.02

2.08

4.00

4.69

5.42

NAV per share (LKR)

14.94

16.15

18.09

19.63

22.54

26.23

30.65

Target price based on Total return

P/E (x)

4.4 x

22.7 x

13.4 x

23.1 x

13.7 x

11.7 x

10.1 x

Valuation method

P/BV (x)

0.6 x

2.4 x

2.2 x

2.4 x

2.4 x

2.1 x

1.8 x

Return %

ROE %
ROCE %

14.4%
10.8%

11.1%
9.5%

17.6%
15.0%

11.0%
10.6%

19.0%
18.3%

19.2%
20.5%

19.1%
20.6%

Rating

EBIT grew 276% YoY to LKR 223mn

A ~23% YoY decline in other operating expenses led to a hike in EBIT growth and margin during
the period. we forecast EBIT to grow 93.1% YoY in FY 2015E and 28.7% YoY in FY 2016E. The
increase in number of surgeries, which is the highest margin generator and curbing expenses,
assisted in LHCL achieving a better than expected bottom line during the period. Rising per
capita income and an increase in medical insurance penetration will be key for the hospital to
maintain a similar performance during the forecast period.
Valuation 20% total upside on CMP
Given the healthy cash position and a zero geared balance sheet we believe LHCL is well positioned to expand its presence in private healthcare industry. Based on a free cash flow valuation we have arrived at a total return of LKR 65.85 which reflects an upside of 20% to CMP. On
relative valuation LHCL is trading at a forward PER of 13.7x based on an EPS of LKR 4.00 in
2015E. The healthcare sector trades at a PER of 28.5x.
For analyst certification and other important disclosures, please refer to the Disclosure and
Disclaimer section at the end of this report.

DCF valuation
19.7%
BUY

LHCL Price Vs ASPI Movement

Source: Company data and BRS Equity Research

Healthy performance in heart centre and cost efficiency pushed bottom line
Higher occupancy rates during the quarter and margins generated from surgical segment
boosted NP margin to 18.8% from 4.7% previously. LHCL enjoyed an occupancy rate of 98% in
Q3 FY 2015 and we forecast it to remain at current levels given a rapid increase in Non communicable Disease (NCD) in the country. Surgical, the highest margin generator for the hospital
contributed 52% to the top line and we expect this segment to continue to drive the hospitals
performance going forward. The drop in admin cost by 1.6% YoY to LKR 593mn reflects the cost
efficiency strategies implemented by the newly appointed management. We expect these
strategies to pay off dividends for the hospital in the long run, giving a competitive edge over
its peers.

65.85

ASPI

ASPI

LHCL

LKR
70

7,500

60
7,000
50
6,500

40

6,000

30

Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16

EPS
LKR
6.00
5.00
4.00
3.00
2.00
1.00
2011

2012

2013

2014 2015E 2016E 2017E

Page 1

Company Information Note

65, Braybrooke Place, Colombo 2, Sri Lanka
research@bartleetreligare.com, +94 11 5220200

29 January 2016

The Lanka Hospital Corporation PLC (LHCL)

Company profile
The Lanka Hospitals Corporation PLC (LHCL) is
a multi speciality tertiary care hospital indirectly owned by the Government of Sri Lanka,
focusing on providing affordable healthcare.
Cardiology, Fertility and Kidney transplants
are fast becoming specialty areas of the hospital.
Revenue LKR mn % Growth (2011-17E)
7,181

14%
13%
17%
17%
20%
2,918

17%

2011

2012

2013

2014

2015E

2016E

2017E

2017E

Gross Profit LKR mn % Growth (2011-17E)

4,271

15%
15%
20%
14%
28%
13%
1,650

2011

2012

2013

2014

2015E

2016E

2017E

2017E

Recurring EBIT LKR mn % Growth (2011-17E)

17%

1,346

29%
93%

339

-0.4%

2011

2012

EBITDA
margin %

76%

-22%

2013

2014

EBITDA margin (%)

2015E

2016E

2017E

EBIT margin (%)

2017E

EBIT margin
%

24.0%

22.0%

22.0%

20.0%
18.0%

20.0%

16.0%

18.0%

14.0%
12.0%

16.0%

10.0%

14.0%

8.0%
2011 2012 2013 2014 2015E 2016E 2017E

Year Ending 31 Dec

Summary Information
BRS EPS (LKR)
BRS EPS growth (%)
P/E (x)
Sector P/E (x)
Reported EPS (LKR)
P/E on reported EPS (x)
NAV per share (LKR)
P/BV (x)
Sector P/BV (x)
DPS (LKR)
Dividend yield (%)
FCFF (LKR mn)
FCFE (LKR mn)
CFPS (LKR)
P/CFPS (x)
Mkt price
Weighted average shares (mn)
Average mkt cap (LKR mn)
Enterprise value (LKR mn)
EV/Sales
EV/EBITDA
Income Statement (LKR mn)
Revenue
Gross Profit
EBITDA recurring
Depreciation and amortisation
EBIT recurring
Finance cost
Exceptionals/non-recurrings
Tax expense
Net income
Minorities & preference dividends
Profit attributable to equity holders
Statement of Financial Position (LKR mn)
Cash and cash equivalents
Inventories
Trade receivables
Fixed assets
Goodwill
Intangible assets
Investments
Associates
Total assets
Trade payables
Interest bearing debt -short term
Interest bearing debt -long term
Total liabilities
Shareholders equity
Minorities
Total equity
Net debt (cash)
Total capital employed
Cash flow (LKR mn)
Cash flow from operations
Net working capital
Capital expenditure
Free cash flow
Investing cash flows
Equity capital
Dividends paid
Net borrowings
Net cash flow
Key ratios
Revenue growth (%)
EBIT growth (%)
Gross Profit Margin (%)
EBITDA margin (%)
EBIT margin (%)
ROCE %
ROE %
Debt/equity (%)
Net debt/equity (%)
Gearing (%)
Interest cover (x)
Payout ratio (%)

2011

2012

2013

2014

2015E

2016E

2017E

1.95
44.3%
4.4 x
34.4 x
1.95
4.4 x
14.94
0.6 x
2.1 x
0.0%
257.34
238.51
1.12
7.6 x
8.50
223.73
1,902
1,313
0.4 x
2.3 x

1.73
-11.4%
22.7 x
14.8 x
1.73
22.7 x
16.15
2.4 x
2.3 x
0.50
1.3%
328.76
328.76
1.35
29.1 x
39.20
223.73
8,770
7,879
2.3 x
13.3 x

3.02
74.4%
13.4 x
16.3x
3.08
13.1 x
18.09
2.2 x
2.5 x
2.00
4.9%
359.79
359.79
0.17
239.4 x
40.50
223.73
9,061
8,132
2.0 x
10.0 x

2.08
-31.0%
23.1 x
14.8 x
2.06
23.3 x
19.63
2.4 x
2.8 x
1.00
2.1%
(72.81)
(72.81)
(0.31)
nm
48.00
223.73
10,739
9,944
2.1 x
14.1 x

4.00
92.4%
13.7 x
na
na
na
22.54
2.4 x
na
1.00
1.8%
853.18
853.18
2.67
20.6 x
55.00
223.73
12,305
10,918
2.0 x
9.3 x

4.69
17.1%
11.7 x
na
na
na
26.23
2.1 x
na
1.00
1.8%
989.78
989.78
3.70
14.9 x
55.00
223.73
12,305
10,090
1.6 x
7.1 x

5.42
15.6%
10.1 x
na
na
na
30.65
1.8 x
na
1.00
1.8%
1,082.48
1,082.48
4.11
13.4 x
55.00
223.73
12,305
9,170
1.3 x
5.6 x

2,918
1,650
561
(222)
339
(3)
59
437
437

3,406
1,858
593
(255)
338
(1)
(53)
387
387

4,072
2,380
815
(221)
594
2
(67)
675
675

4,754
2,704
708
(243)
465
(4)
(68)
466
466

5,566
3,251
1,169
(272)
897
(0)
(126)
896
896

6,285
3,727
1,427
(273)
1,154
(185)
1,049
1,049

7,181
4,271
1,625
(278)
1,346
(214)
1,212
1,212

672
145
245
2,825
4,009
311
82
665
3,344
3,344
(589)
3,426

1,002
149
260
2,818
1
4,366
340
111
753
3,613
3,613
(891)
3,723

1,064
176
472
3,233
6
5,096
551
135
1,049
4,047
4,047
(929)
4,182

995
310
549
3,589
9
5,610
566
199
1,217
4,393
4,393
(795)
4,592

1,557
338
645
3,699
63
6,421
676
170
1,377
5,043
5,043
(1,387)
5,213

2,384
381
726
3,745
63
7,439
761
170
1,571
5,869
5,869
(2,215)
6,038

3,305
435
831
3,831
63
8,620
870
170
1,762
6,858
6,858
(3,135)
7,027

522
1
(268)
254
(248)
(23)
251

579
(250)
329
(165)
(112)
302

777
(417)
360
(292)
(447)
38

531
(604)
(73)
(552)
(112)
(69)

1,099
(245)
853
(237)
(336)
598

1,304
(314)
990
(253)
(224)
828

1,442
(359)
1,082
(298)
(224)
920

-7.6%
16.7%
56.5%
19.2%
11.6%
10.8%
14.4%
2.5%
-17.6%
2.4%
104.4 x
0.0%

16.7%
-0.4%
54.6%
17.4%
9.9%
9.5%
11.1%
3.1%
-24.7%
3.0%
na
28.9%

19.6%
75.6%
58.5%
20.0%
14.6%
15.0%
17.6%
3.3%
-23.0%
3.2%
na
66.3%

16.8%
-21.7%
56.9%
14.9%
9.8%
10.6%
11.0%
4.5%
-18.1%
4.3%
na
48.0%

17.1%
93.1%
58.4%
21.0%
16.1%
18.3%
19.0%
3.4%
-27.5%
3.3%
na
25.0%

12.9%
28.7%
59.3%
22.7%
18.4%
20.5%
19.2%
2.9%
-37.7%
2.8%
na
21.3%

14.3%
16.6%
59.5%
22.6%
18.7%
20.6%
19.1%
2.5%
-45.7%
2.4%
na
18.5%

Page 2
Source: LHCL Annual Reports and BRS Equity Research

BRS Equity Research

Q3 FY 15 Performance

Q3 FY 15

Q3 FY 14

Q2 FY 15

Revenue

1,381

1,215

1,348

YoY growth (%)

13.6%

24.9%

26.9%

QoQ growth (%)

2.5%

14.4%

3.6%

Recurring Net profit

259

58

209

BRS EPS as adjusted (LKR)

0.93

0.26

0.93

YoY growth (%)

350.4%

-52.9%

191.5%

QoQ growth (%)

24.1%

-19.7%

28.1%

NAV per share (LKR)

22.36

19.29

21.20

ROCE %

16.9%

21.2%

13.9%

ROE %

17.7%

11.6%

13.8%

Net debt/equity (%)

-29.1%

-17.0%

-22.7%

3.3%

4.4%

5.4%

8.7

8.5

6.5

41.1

82.3

30.2

All figures in LKR mn

Gearing (%)
EV/Sales
EV/EBITDA

Valuation estimates

Based on a free cash flow valuation we have arrived at a target price of LKR 64.85. Our
valuations are based on the following estimates.

WACC 13.1%
Terminal Growth rate 3%
Risk-free rate 9.60% (Five year bond rate)
Beta 1
Equity risk premium 5%

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Page 3

BRS Equity Research

Sensitivity of Target Price to Risk Free Rate

Risk free rate - 5 year treasury bond rate

64.85

7.88%

8.38%

9.60%

9.38%

9.88%

Terminal

2%

69.40

66.96

61.71

62.59

60.63

growth rate

3%

73.77

70.91

64.85

65.86

63.61

4%

79.26

75.84

68.67

69.86

67.23

Peer Comparison
Relative Valuations
Peer Companies

CHL

NHL

ASIR

AMSL

LHCL *

8.13

0.08

1.34

0.67

3.68

96.28

2.78

5.94

6.41

22.36

11.2 x

37.5 x

17.1 x

17.9 x

14.9 x

0.9 x

1.1 x

3.9 x

1.9 x

2.5 x

8.59

9.20

57.63

40.46

29.40

11.4%

12.0%

14.7%

9.7%

16.9%

9.5%

3.1%

16.4%

10.7%

17.7%

91.30

3.00

22.90

12.00

55.00

TTM Earnings Per Share (EPS) LKR

2015-16

Latest Net Asset Value (NAV) LKR

2015-16

Price-to-Earnings (x)
2015-16

Price-to-Book (x)
2015-16

EV/No of Rooms (x)

2015-16

ROCE (%)
2015-16

ROE (%)
2015-16

MPS (LKR)
29.01.2016

* LHCL's financial year ends on 31st Dec.

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BRS Equity Research

Financial Analysis
Income Statement - The Lanka Hospitals Corporation PLC
Year Ending 31st Dec (LKR mn)

2011

2012

2013

2014

2015E

2016E

2017E

Revenue

2,918

3,406

4,072

4,754

5,566

6,285

7,181

YoY growth %

-7.6%

16.7%

19.6%

16.8%

17.1%

12.9%

14.3%

Cost of Services Rendered

(1,268)

(1,548)

(1,692)

(2,050)

(2,315)

(2,559)

(2,910)

Gross Profit

1,650

1,858

2,380

2,704

3,251

3,727

4,271

Gross Profit margin %

56.5%

54.6%

58.5%

56.9%

58.4%

59.3%

59.5%

YoY growth %

17.7%

12.6%

28.1%

13.6%

20.2%

14.6%

14.6%

23

25

30

53

41

40

40

Total SG & A expenses

(1,333)

(1,546)

(1,815)

(2,297)

(2,396)

(2,612)

(2,965)

YoY growth %

18.4%

15.9%

17.4%

26.6%

4.3%

9.0%

13.5%

Other operating Income

Total depreciation and amortisation

(222)

(255)

(221)

(243)

(272)

(273)

(278)

EBIT including non-recurring items

339

337

595

461

897

1,154

1,346

Non-recurring items

(1)

(4)

(0)

EBIT excluding non-recurring items

339

338

594

465

897

1,154

1,346

YoY growth %

16.7%

-0.4%

75.6%

-21.7%

93.1%

28.7%

16.6%

EBIT margin %

11.6%

9.9%

14.6%

9.8%

16.1%

18.4%

18.7%

561

593

815

708

1,169

1,427

1,625

YoY growth %

14.3%

5.7%

37.4%

-13.1%

65.2%

22.1%

13.8%

EBITDA margin %

19.2%

17.4%

20.0%

14.9%

21.0%

22.7%

22.6%

Finance income

42

102

148

69

125

80

80

Finance Cost

(3)

378

440

742

534

1,022

1,234

1,426

24.7%

16.4%

68.6%

-28.0%

91.4%

20.8%

15.6%

59

(53)

(67)

(68)

(126)

(185)

(214)

437

387

675

466

896

1,049

1,212

YoY growth %

44.3%

-11.4%

74.4%

-31.0%

92.4%

17.1%

15.6%

NP Margin

15.0%

11.4%

16.6%

9.8%

16.1%

16.7%

16.9%

EBITDA excluding non-recurring items

Recurring profit before tax

YoY growth %
Income tax expense
Recurring Profit After Taxation

Earnings per share - BRS adjusted (1)

1.95

1.73

3.02

2.08

4.00

4.69

5.42

Earnings per share - unadjusted (2)

1.95

1.73

3.02

2.06

4.00

4.69

5.42

Source: Company Financial Reports and BRS Equity Research

Note 1: EPS adjusted for share split, consolidations and non recurring information
Note 2: Based on earnings as reported (unadjusted for non-recurring) share data adjusted for splits
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BRS Equity Research

Financial Analysis
Statement of Financial Position - The Lanka Hospitals Corporation PLC
As at 31st Dec

2011

2012

2013

2014

2015E

2016E

2017E

2,825

2,817

3,226

3,580

3,636

3,682

3,767

63

63

63

Non Current Assets

Property, plant and equipment
Intangible Assets

Advance lease premium

120

134

148

162

175

189

203

2,945

2,952

3,380

3,750

3,874

3,934

4,034

Inventories

145

149

176

310

338

381

435

Trade and other receivables

245

260

472

549

645

726

831

Current Assets

Amounts due from related parties

14

16

672

1,002

1,064

995

1,445

2,272

3,193

1,064

1,414

1,716

1,860

2,434

3,393

4,474

4,009

4,366

5,096

5,610

6,309

7,328

8,508

Share Capital

2,672

2,672

2,672

2,672

2,672

2,672

2,672

Retained earnings

(203)

96

355

731

1,227

2,053

3,042

3,344

3,613

4,047

4,393

4,931

5,757

6,746

43

52

67

105

124

138

151

Cash and cash equivalents

Total assets
Equity and liabilities

Total Equity
Non-Current Liabilities
Retirement benefit obligations
Interest bearing borrowings

Deferred tax liabilities

225

246

278

294

332

332

332

268

297

345

399

456

470

483

311

340

551

566

676

761

870

14

49

70

163

232

Current Liabilities
Trade and other payables
Amounts due to related parties
Income tax payable

Dividend Payable

Interest bearing borrowings (Bank OD)

Total liabilities
Total equity and liabilities

82

111

135

199

170

170

170

398

456

704

819

922

1,101

1,280

665

753

1,049

1,217

1,377

1,571

1,762

4,009

4,366

5,096

5,610

6,309

7,328

8,508

Source: Company Financial Reports and BRS Equity Research

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BRS Equity Research

Financial Analysis
Statement of Cash flow - The Lanka Hospitals Corporation PLC
As at 31st Dec

2011

2012

2013

2014

2015E

2016E

2017E

EBIT including non-recurring items

339

337

595

461

897

1,154

1,346

Depreciation

222

255

220

241

267

268

273

Cash flow from operating activity

Amortisation of advance lease premium

Amortisation of government grants

Amortisation of Intangible Assets

profit/loss on sale of Property,plant and Equipment

(2)

Provision/(reversal of provision) for inventories

Provision/(reversal of provision) for doubtful debts

Provision for obsolete stocks

Gratuity

13

Other

10

18

33

14

31

22

22

Operating Profit/(loss) before Working Capital Changes

582

612

838

756

1,206

1,449

1,647

Changes in working capital

(59)

(8)

(28)

(206)

(81)

(46)

(51)

Cash generated from operations

523

604

810

550

1,126

1,404

1,596

Finance cost paid

(1)

Gratuity paid

(1)

(9)

(5)

(4)

(13)

(8)

(9)

Income taxes paid

(16)

(28)

(15)

(14)

(92)

(145)

522

579

777

531

1,099

1,304

1,442

(268)

(250)

(417)

(604)

(245)

(314)

(359)

Cash generated from operations

Cash flow from investing activity
Acquisition of Property, plant and equipment
Purchases of intangible assets

(1)

(6)

(4)

(36)

Disposal of property, plant & equipment

Advance lease premium paid

(19)

(19)

(19)

(19)

(19)

(19)

(19)

Interest income

39

102

148

69

61

80

80

(248)

(165)

(292)

(552)

(237)

(253)

(298)

(8)

Repayment of Syndicate loan

(15)

Dividend paid

(112)

(447)

(112)

(447)

(224)

(224)

Net cash flow from financing activities

(23)

(112)

(447)

(48)

(375)

(224)

(224)

Net Increase/(Decrease) in Cash & Cash Equivalents

251

302

38

(69)

487

828

920

Net cash out flow from investing activities

Cash flow from financing activity
Repayment of NDB loan

Source: Company Financial Reports and BRS Equity Research

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BRS Equity Research

Top 20 Shareholders as of 30.09.2015

Shareholder

No. of Shares

% holding

Sri Lanka Insurance Corporation Ltd - Life Fund

66,097,350

29.54

Fortis Global Healthcare Holdings Pte Ltd

64,120,915

28.66

Sri Lanka Insurance Corporation Ltd - General Fund

56,080,643

25.07

Property Development PLC

21,329,000

9.53

HSBC INTL NOM LTD - BBH - Grandeur Peak Emerging Markets Opportunities Fund

1,640,200

0.73

Bank of Ceylon A/c Ceybank Unit Trust

1,178,731

0.53

Bank of Ceylon A/a Ceybank Century Grwoth Fund

559,690

0.25

Ceylon Investment PLC A/c # 01

448,000

0.20

Carlines Holdings (Private) Limited

380,000

0.17

10

Mr. T.L.M. Imtiaz

280,820

0.13

11

Mr. H.W.M.Woodward

220,300

0.10

12

Mr. A.H Munasinghe

179,471

0.08

13

Ms.F.A.A Mack

175,800

0.08

14

Life Insurance Corporation (Lanka) Ltd

159,379

0.07

15

Dr.S.M.T.B. Samarakoon

151,656

0.07

16

Mr.M.R.Rasheed

146,776

0.07

17

Mr.W.W.B.R.V.Wijekoon

124,289

0.06

18

Mr.M.R.Rasheed

123,852

0.06

19

Mr.B.M.G.Rathnasiri

120,733

0.05

20

Dr.D.Rajakanthan

115,000

0.05

Source: Company interim financial statements

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BRS Equity Research

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