Erste reduces the price target for MedLife shares to 20.1 lei

Erste Group reduced the price target for MedLife (M) shares to 20.1 lei, compared to the 20.9 lei indicated in May, and changed the recommendation from "Buy" to "Hold" for the shares of the private medical services, according to the latest analysis report signed by Caius Râpanu, which was published on the BVB Research Hub website.

The new target is 6.2% above MedLife's August 29 share price of 18.92 lei. In the last month and a half, the shares of the private medical services provider have fluctuated around the price of 19 lei. Previously, Erste had reduced the target from 22.4 lei, which had been indicated at the beginning of March, to 20.9 lei.

"We change our recommendation for MedLife shares to "Hold", at the same time marginally reducing the target price to 20.1 lei/share. We recognize that it is another weak quarter (n.r. referring to MedLife's second quarter financial results), we are only partially convinced by management that the second quarter of 2023 is the inflection point in the company's profitability profile, and we adjust in down financial forecasts for the end of the year", the report states.

According to the document, MedLife's revenue growth appears to be accompanied by a persistent increase in expenses, including finance, as well as margin erosion, which management does not yet appear to have halted through cost control. "Even if based on pro-forma situations the picture is a little better, the trend remains similar," the report states.

According to Erste, MedLife's current policy of focusing its efforts on organic growth rather than expansion based on acquisitions should bear fruit, but it is still too early to count on immediate and long-term results duration.

"For now, in our assessment, the lower profitability appears to have been balanced by the reduction in the cost of risk, leading us to keep our price target largely intact. However, if the reversal of the margin trend does not become clear during the current quarter, we may be forced to revise our target price more substantially. The (company's) fundamentals remain solid and our investment rationale remains sound, with key drivers still present - capitalizing on a growing market, largely inelastic pricing and lack of lower-cost alternatives, and falling inflation should support profitability." it is mentioned in the report.

For this year, Erste estimates that the MedLife Group will have net sales of 2.18 billion lei and a net profit of 44.2 million lei, with a margin of 2%.

The Marcu brothers jointly owned, in the middle of this year, 25.4% of the medical service provider, while Mihaela Cristescu, the mother of the two, had 14% of the company. The Pilon II pension fund managed by NN owned 13.2% of MedLife, according to data posted on the Bucharest Stock Exchange.

The stock market valuation of the medical service provider amounts to 2.5 billion lei.