Shifa International Hospitals Limited (PSX: SHFA) was established in 1987as a private limited company and became public in 1989. Currently it is present in two cities, two facilities in Islamabad and one in Faisalabad.

Shareholding pattern

Majority of the owners are individuals-about 69 percent while the ‘others’ category owns about 17 percent of the company, followed by mutual funds and insurance companies, holding 5.47 percent and 4.81 percent, respectively. The remaining shares are distributed between financial institutions, investment companies, joint stock companies and charitable trusts.

Historical operational performance

Shifa International’s net revenue has been growing consistently although at varying rates. During FY15, SHFA’s revenue grew by nearly 16 percent year on year, however, it was accompanied by an increase in costs of servicing as a percentage of revenue, consuming nearly 89 percent of it. A large part of the costs was made up by salaries and wages, utilities and medicines pushing the costs up by 17 percent year on year.

The growth rate of net revenue increased in FY16, from about 16 percent in FY15 to almost 18 percent in FY16.although costs increased in value terms, as a percentage of revenue it has rather reduced even if marginally. Salaries, wages, medicines, utilities and supplies were again a major component of operating costs. This allowed profits before taxation to swell, increasing from Rs726 million in FY15 to Rs1.04 billion in FY16. In addition, other income also contributed to higher net margins. This was sourced from an increase in sales of Shifa News, a magazine of Shifa Publications and advertisement income among others.

During FY16, the company also intended to acquire 1.2 million shares of its subsidiary company, Shifa Consulting Services (Private) Limited which would make the latter a wholly owned subsidiary of Shifa International Hospitals Limited.

Profitability during FY17 reduced despite the growth in revenue. The growth in costs surpassed the growth rate of revenue, hence causing margins to reduce. Although income from other sources also improved, it was unable to salvage the situation much. One factor that brought some relief was the decline in finance costs as a result of a repayment of long term loan and a lessening of KIBOR.

The company’s annual report for the year claims that the reduction in operating margins was a result of the economic instability in the Middle East particularly which led them to cut back on employment opportunities and a resultant fall in the number of candidates who visit the hospital for mandatory medical checkups as part of the countries’ visa/employment requirement.

Lower profitability and margins continued in FY18 due to the sit-in procession along with the political chaos which hampered the revenue. Although it increased by 10 percent year on year it was lower than the company’s expectations. Moreover, costs consumed a significant 92.5 percent of the revenue which left little room for other costs and profits. Furthermore, there was a major decline in income generated from other sources which dampened profits. Although the decline was across the board, the most major fall was seen in profit on investments and bank deposits which reduced from Rs58 million in FY17 to nearly Rs12 million in FY18.

A prominent incline in net revenue combined with control on costs allowed the company to record its highest net profit at Rs777 million. Net revenue grew by a little over 14 percent while costs took up about 90 percent of the topline, down from almost 93 percent in the preceding year. Salaries, wages, medicines and supplies made up a major chunk of costs as always, while finance costs rose in accordance with increase in policy rates. The increase in revenue more than compensated for the decline in income from other sources thus profit margins inclined, as is depicted in the graph.

Quarterly results and future outlook

The recent quarterly results announced for the three months ended September 30, 2019 shows revenue growing by 15 percent year on year due to increase in the volume of business. While this was also accompanied by an increase in costs, however as a percentage of revenue it had actually declined from 93 percent of revenue in 1QFY19 to about 90 percent in 1QFY20. While finance costs had escalated during the period when compared to previous year’s first quarter, the gain on disposal of leasehold land pushed the profits higher. This is also reflected in the higher earnings per share of Rs 9.94 as compared to last year’s Rs 2.45.

The company agrees that the previous quarters have been tough in terms of conducting business; however, it hopes to sustain existing profits if not increase it given the challenging macroeconomic environment. The company plans to do so by improving the quality of services, enhancing capacity particularly in the out-patient segment by extending clinic timings in addition to improving capacity for in-patient.