Medicare

By Muhammad Hamza Sohail

Recommendation:
Undervalued Buy Ticker MCGS.QD
Sector Industrials
The FCFF valuation shows a share ISIN QA0006929754
price expectation of QAR 7.41, an 52wk High/ 10.67/6.8
increase of nearly 7.24% from the Low
current price of QAR 6.9 Market Cap 1.944Bn
(bn)
Free Float 828.5M
(QAR M)
 • MCGS net income was up by 3.86% at Q4
2021, from Q4 2019.
• The covid restrictions have taken a toll
on the healthcare industry Till mid-
2021, only essential and urgent
Highlights Medicare procedures were allowed,
which retrained the business from
carrying out normal activities, hence
resulting in the weak CAGR of 0.8%.
 • New Mandatory health insurance
scheme

Catalysts: • Anticipated lifting of Covid restrictions

Business Model
MCGS vs QSE
• MCGS shares have been dropping constantly
since last year may
• drop was sharper in 2022 as MOPH reduced
the hospital operation capacity from 80% to
40% when Omicron wave hit
 DCF Valuation
EBIT 87,099,347 91,564,416 96,052,614 100,598,582 105,231,038
Tax 2,177,484 2,289,110 2,401,315 2,514,965 2,630,776
After 1-TAX 84,921,863 89,275,306 93,651,298 98,083,618 102,600,262
Depreciation (15,500,000) (15,500,000) (15,500,000) (15,500,000) (15,500,000)
After DEPRECIATION 100,421,863 104,775,306 109,151,298 113,583,618 118,100,262
Amortization 2,790,936 2,185,668 1,711,665 1,340,458 1,049,754
After AMMORTIZATION 103,212,799 106,960,974 110,862,963 114,924,075 119,150,016
Change in Working Cap. 3000000 3,028,133 3,149,259 3,275,229 3,406,238
After Working Capital 102,828,799 103,932,841 107,713,704 111,648,846 115,743,778
CAPEX 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000
FCFF 47,228,799 78,932,841 82,713,704 86,648,846 90,743,778

Valuation 40,630,964 65,471,615 62,484,234 59,614,708 56,859,777

 EBIT
2020 2021 2022 2023 2024 2025 2026
Revenue 490,678,494 481,747,661 491,382,614 511,037,919 531,479,436 552,738,613 574,848,157

Operating Costs (300,650,783) (298,036,918) (301,245,487) (313,295,306) (325,827,119) (338,860,203) (352,414,612)

Gross Profit 187,004,651 183,710,743 190,137,127 197,742,612 205,652,317 213,878,409 222,433,546
Other income 10,231,987 6,678,528 8,579,765 8,579,765 8,579,765 8,579,765 8,579,765
Income from deposits with an Islamic
Bank 371,484 259,466 315,475 315,475 315,475 315,475 315,475

General and administrative expenses (89,068,018) (89,370,066) (93,642,084) (97,387,768) (101,283,278) (105,334,609) (109,547,994)

Provision for impairment of receivables (219,792) (15,993) - - - - -

Reversal of expected credit losses on due
from banks 45,395 - - - - - -

Depreciation (14,997,584) (15,506,640) (15,500,000) (15,500,000) (15,500,000) (15,500,000) (15,500,000)

Fair value gain on investment properties 54,278 12,144 - - - - -

Amortisation of right-of-use assets (4,550,729) (3,563,817) (2,790,936) (2,185,668) (1,711,665) (1,340,458) (1,049,754)

Finance costs (3,363,335) (3,143,228) - - - - -

Net Profit 85,508,337 79,061,137 87,099,347 91,564,416 96,052,614 100,598,582 105,231,038
DCF
Sum of PV of FCFF: 285,061,299
Terminal Value: 652,595,172
Enterprise Value: 937,656,471
Less Debt: 50179808
Expected Share Price: 7.41

Sum of PV of FCFF Terminal Value

 Sensitivity Analysis
Sensitivity Analysis
Growth Rate
The sensitivity analysis shows that the minimum
price of share with a positive growth rate will be 0.08% 1.60% 2% 4%
5.85 and the maximum is 7.58. Terminal 0.03% 5.85 6.27 6.39 6.98
Growth
0.50% 6.53 6.64 7.25
1% 6.81 6.93 7.58
 • The beta used for calculations is 1.04, the 5-year beta.
This is exceptionally higher than its international
industry median, which has a 0.81 median. The beta is
high because of the fluctuations in the share price due to
the confusion around the company’s future
• WACC 2022-2026 is 9.8% (QNB financial services
figures)
DCF • for next 5 years I did not used CAGR, because I believe
Assumptions Ahli's growth had been hindered due to covid. Keeping
in mind the new healthcare system and lifting of
impositions, I kept 2022’s growth 2% and then 4%
2023. 2022’s 2% is 1/3rd of the year has gone by and
the hospitals are still operating at 40% capacity.
• Terminal growth rate of 1% used, as the business will
slow down due to expats leaving
 • Used % of sales for COGS
• Used an average of Other Income as the breakdown includes 8
different components with 4 of their components unexplained
and hence speculative, e.g. foreign currency, misc. Also one
component, rent concession is unexplained as to why they
didn't get this year
• Not taking into account 2019 figure for Islamic bank as the
figure is an outlier and explanation is not provided. Therefore
taking the safer way of averaging out 2019 and 2020
• not including the initial astronomical change in working cap for
Continued 2022 due to the turnover method, and smoothening it out by
an estimate
• I reduced the average CAPEX by 50% for 2022 onwards as the
Ahli was having major extension and a new branch opening,
both which incurred astronomical Capital Expenditures. These
projects are expected to be wound up in 2022, therefore the
capex costs for the following years should be more about
maintaining