Shifa International Hospitals Limited

Shifa International Hospitals Limited (PSX: SHFA) was set up in 1987 as a private limited company although the idea was conceived in two years prior in 1985. Two years later, in 1989 it was converted into a public limited company. The company establishes and runs medical centers and hospitals, as well as pharmacies and lab collection points.

Shareholding pattern

As at June 30, 2020, over 59 percent of the shares are held under the category of individuals. A further breakdown reveals that close to 12 percent shares are owned by Tameer-e-Millat Foundation and International Finance Corporation. The directors, CEO, their spouses and minor children also collectively own about 12 percent shares. Close to 15 percent shares are with “others”; over 7 percent in insurance companies. The remaining about 7 percent shares is with the rest of the shareholder categories.

Historical operational performance

While net revenue for Shifa International Hospitals has been growing consecutively for the last six years, profit margins have followed a downward trajectory over the years.

Shifa International experienced one of the lowest growth rates in its topline during FY17, at a little over 6 percent. However, operating costs that made a huge part of the overall costs, roughly 91 percent of total revenue, increased year on year (FY16: 87.8 percent). This was due to increase in salaries of nursing staff, trainees, and costs associated with supplies and medicines. Moreover, finance cost nearly halved as long-term loan was paid off coupled with a reduction in KIBOR. But it was not sufficient to maintain profit margins that reduced from nearly 12 percent in FY16 to over 9 percent in FY17. The company claims that owing to the economic crisis in Saudi Arabia along with other Middle East countries, the population that visited the hospital for mandatory medical checkups reduced that adversely affected profitability.

Topline in FY18 was recorded close to 11 percent, however with operating costs consuming more than 92 percent of revenue, the highest seen thus far, it created a dampening effect on profitability that fell from 9 percent of FY17 to 7.5 percent in FY18. Located in Islamabad, the company was also affected by the sit in and the political unrest and uncertainty. Furthermore, other income that had been contributing close to or more than 1 percent of revenue for the last four years, fell considerably. Most of the fall was seen in income from profit on investments and bank deposits, that stood at Rs 58 million in FY17, and fell to nearly Rs 12 million in FY18.

During FY19, the company saw one of the highest growth rates in revenue, at over 14 percent. Most of this incline was seen coming from inpatients department, which was also the biggest contributor to the total revenue pie. There was some improvement in operating costs, as although they increased in absolute terms, as a share in revenue, it had reduced to 90 percent. This helped in improving profitability despite other income nearly disappearing that had previously contributed a notable share towards the bottomline. Thus, net margin increased marginally to 6.6 percent during the year, compared to 5.4 percent in FY18.

Revenue growth was considerably subdued in FY20 at 3.4 percent; revenue breakdown reveals that inpatients division, that makes the highest contribution to the total revenue, remained mostly flat, while it was the outpatients and pharmacy that witnessed increases. Operating costs, on the other hand, jumped to more than 94 percent- the highest seen. While salaries expense, which makes a significant share in total costs increased in value terms, as a share in total costs, it had actually decreased. Thus, despite operating in the essential services industry, the company’s profitability was still adversely affected by the outbreak of the pandemic. Finance costs also rose significantly to over 5 percent of revenue owing to a higher KIBOR and long-term financing, bringing net margin to its all-time low of 4 percent.

Quarterly results and future outlook

During the first quarter of FY21, revenue was lower by almost 3 percent year on year. This was largely attributed to the outbreak of the Covid-19 break that occurred towards the end of the first quarter. Therefore, the decline in business is not as pronounced.

The second quarter actually saw revenue inclining, both from the same period last year as well as from the previous quarter. This was due to adopting safety measures before the second wave of Covid-19 hit.

Comparing 1HFY21 year on year, the decline in revenue was marginal at less than 1 percent. However, it was the “gain on disposal of freehold/leasehold lands and building” that was primarily responsible for raising profitability in 1HFY20. If this income were to be excluded, the decline in net margin, with latter recorded at 4 percent for 1HFY21, is not significant.

The event of Covid-19 not only impacted the usual business operations for the company, but also the construction of new projects that are to resume once restrictions are lifted.