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HEALTHCARE PROVIDERS MARCH 2008
Initiating Coverage: Redefining Brazilian Healthcare?
Daniel Gewehr* Luis Miranda*, CFA
Brazil: Banco Santander S.A. Mexico: Banco Santander S.A.
(5511) 3012-5787 (5255) 5269-1926
dhgewehr@santander.com.br lmiranda@santander.com.mx
In this report we are initiating coverage of the two listed Brazilian healthcare companies, Amil and Medial Saúde, with Buy
ratings on both stocks. We provide an overview of the domestic healthcare industry, the ongoing consolidation trend, and
examine each company in detail, comparing their attractiveness in terms of investment value. Finally, we include a section on
each company with more information on valuation metrics and earnings forecasts.
• We have a positive view on the healthcare industry in Brazil. The attractiveness of the Brazilian Healthcare sector is
currently associated with several factors; including: (1) the underserved market, with just 20.5% of the population with
access to private healthcare services; (2) the aging population, with the percentage of people older than 65 years expected to
grow from 6% to around 20% of population by 2050 and; (3) the significant room for consolidation, based on (a) a
fragmented market, with the five largest companies accounting for less than 24% of total membership and (b) stricter
regulatory requirements expected from the National Health Agency (ANS). Our call is also supported by the projections for
an improved domestic macroeconomic environment and rising employment, as well as increasing per capita GDP.
• Our top pick is Amil. We believe that Amil will benefit most from the growth trend of the sector, mainly due to its ability
to control costs and given that it is the highest capitalized managed care organization (MCO) in the Brazilian market. Since
this is a low-margin industry, cost control is key and Amil has a more stable medical loss ratio (MLR) compared with
Medial. Amil focuses on preventive medicine and uses its own medical care network to deal with chronic cases. Amil
gained a solid cash position from its IPO in October 2007 (roughly R$1 billion) and we expect it to be the major Brazilian
market consolidator. Since December 2006, Amil has acquired seven companies. We expect an EBITDA CAGR 2007-2010
of 32% for Amil. We are initiating coverage of AMIL3 shares with a year-end 2008 target price of US$10.60, yielding a
total potential return of 78.5% compared with the 12.1% return we expect for our Brazilian benchmark for the same period.
• We are also positive on Medial, primarily as turnaround story. Medial has been going through a turnaround since 2007,
when the company’s low-end strategy hurt its medical costs, particularly in 2Q07. Medial’s 2007-10 EBITDA CAGR of
66% indicates faster EBITDA growth than Amil’s, although we expect slower growth in the number of members. The
acquisition of Amesp in March 2007 brought not only greater experience in the low-end market, but also a comprehensive
network of hospitals. Considering its 12-month 71% underperformance vs. the Ibovespa to February of this year, we believe
1Q08 results could act as a trigger for stock prices, as we expect the company to post an improved recurring medical loss
ratio. We are initiating coverage of MEDI3 shares with a year-end 2008 target price of US$17.40, representing a total
potential return of 59.5% compared with the 12.1% we expect for our benchmark in the same period.
• The key risks for both companies would include: (1) the competitive environment; (2) execution risk; (3) overpaying for
acquisitions; (4) related party transactions and contingencies; (5) domestic macroeconomic exposure; (6) regulatory issues.
TABLE OF CONTENTS
Why be Exposed to the Brazilian Healthcare Market? ............................................................ 3
Underserved Market............................................................................................................. 3
Aging Population ................................................................................................................. 4
Consolidation Seems Inevitable…. and Amil and Medial Appear Ready For it ................. 6
What is Required to Succeed in this sector? ........................................................................ 8
Investment Discussion: Amil and Medial.............................................................................. 10
Valuation And Multiples.................................................................................................... 12
Amil ...................................................................................................................................... 15
Earnings Outlook ............................................................................................................... 18
Valuation ............................................................................................................................ 19
Medial Saúde ......................................................................................................................... 25
The Turnaround is Underway ............................................................................................ 27
Earnings Outlook ............................................................................................................... 29
Valuation ............................................................................................................................ 31
Important Healthcare Topics.................................................................................................. 37
MLR Control is a Key Factor for Success ......................................................................... 37
Should MCOs Trade with Higher Multiples vs. Healthcare Insurance companies? .......... 39
Dental Care Offers Growth Through Cross-Selling Opportunities.................................... 39
Better Macro Environment Supports Our Call................................................................... 40
Appendix A – Overview of Brazilian Healthcare Listed Companies .................................... 41
Appendix B –Related Parties’ Transactions .......................................................................... 43
Appendix C – Brazilian Healthcare overview ....................................................................... 44
Important Disclosures ............................................................................................................ 47
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