HOW HMG MAKES MONEY

Dr. Sulaiman Al-Habib Medical Services Group (HMG) Company is a Saudi Arabia-based company engaged in health care sector. The Company operates through it's subsidiaries in three segments: Hospitals, Pharmacies and Other. The Hospital segment is engaged in setting up, managing and operating hospitals, medical facilities, pharmacies and medical diagnostic and radiological laboratories. The Pharmacies segment operates Al Habib Pharmacies, Middle East Pharmacies Company and Afia Pharmacies Company. The Other segments include management and operations services for third party, home healthcare service, intensive care units, ambulatory transportation, facility maintenance services information technology and systems services, cloud solutions, among others. The Company also provides import and export, wholesale and retail sale of medicines, medical and herbal products, cosmetics, medical devices and equipment. The table shows the proportion of Disney's total revenues and operating income that come from each segment.

HMG - Segment Revenues and Gross Profit SAR' millions

Hospitals Pharmacies HMG Solutions/ Others Total

Revenue 3,583 846 157 4,586

% of Total 78.1% 18.4% 3.4% 100.0%

Gross Profit 1,130 281 61 1,472

% of Total 76.8% 19.1% 4.1% 100.0%

Source: HMG Company Annual Report (2019)

HMG NUMBERS

Use the following information on Dr. Sulaiman Al-Habib Medical Services Group to answer the case questions.

HMG's current stock price is SAR 91.00 per share. The average growth rate of the company's dividend has been 2.31 % from 2017 through 2019.

HMG's return on equity is 22.06% and the company retains approximately 85.0% of its profits while paying out the remaining 15.0% in dividends.

The company's stock currently trades at 36.54 times its current year earnings estimate of SAR 2.49 per share.

Analysts expect the company to earn SAR 2.49 per share in 2020 and SAR 2.93 in 2021.

HMG's peers in Hospitals trade at 25.5 times their current year earnings estimates while peers in Pharmacies products at 21.9 and HMG Solutions at 14.1.

Assume the expected return for HMG's stock is 6.9%.

Case questions

1. CalculateHMG's intrinsic value using the constant growth model. Next year's dividend is projected to be SAR 2.49 per share and the stock's expected return is 6.9%. Historically, the company has retained 85.00%of its profits and its return on equity in 2020 is expected to be 22.06%. (3 points)
2. CalculateHMG's intrinsic value using the multi-stage growth model. Last year's dividend was 2.35 per share and the stock's expected return is 6.9%. The dividend is expected to grow 3.31% for two years and then 2.31% forever after. (3 points)
3. CalculateHMG's intrinsic value using the dividend discount model. The projected dividends are listed below. The company's earnings in year 3 are projected to be 2.85. The discount rate is 6.9%. The company's PE ratio is 36.54x. (3points)
4. CalculateHMG's intrinsic value using market multiples based on the HMG Data in Numbers above. (3 points)
5. ReconcileHMG stock's intrinsic value, considering the strengths and weaknesses of each valuation approach. (3 points)