Saudi Arabian Market Community

Specialized Sector Valuation: Residual Income (RI) ModelYou pointed out the importance of fair value assuming a 3-year horizon based on Residual Income. This is the most accurate sectoral model for utilities, calculated as follows:$$V_0 = BV_0 + \sum_{t=1}^{n} \frac{NI_t - (r_e \times BV_{t-1})}{(1 + r_e)^t}$$ Where:$BV_0$: Current Book Value per share (~19.5 SAR).$NI_t$: Expected Net Income.$r_e$: Target Cost of Equity, assumed at 8.0% given the defensive nature of the company.Residual Income = Net Income - (Cost of Equity × Book Value).Application to SEC:Due to the Mudaraba instrument and regulatory constraints, the company's ROE is roughly 3.5% to 4.5%, which is lower than the Cost of Equity ($r_e = 8\%$).Since $ROE < r_e$, the "Residual Income" is technically negative. This is the precise scientific and logical explanation for why the stock currently trades at (16.73 SAR), which is below its book value (19.5 SAR). The market discounts this difference.Fair Value in 3 Years (2029):Expecting slight operational efficiency improvements (smart meters and green financing), and assuming ROE stabilizes at 5.5% while maintaining the fixed payout policy (0.70 SAR), the fair value calculated using the RI model for the next 3 years centers in the range of 17.80 to 18.50 SAR.

Set with the author's own calculation method

Step 1 — Earnings Normalization (cleaning the input) Reported Q1 2026 net profit was 23.5M SAR, but it contained a non-cash loss of 13.3M from fair-value revaluation of derivative instruments. Stripping that out: Normalized Q1 2026 profit = 23.5 + 13.3 ≈ 36.8M SAR This is the single most important step. Garbage in, garbage out — any multiple applied to the polluted 23.5M figure would have produced a fake fair value. Step 2 — Annualizing with seasonal adjustment I did not simply multiply 36.8 × 4 = 147M, because Q1 was the seasonal trough (Ramadan + Eid suppressed elective procedures). Q1 2025 normalized was 51.1M while full-year 2025 delivered 200.4M — meaning Q1 historically contributes roughly 25% or slightly less of the year. Applying a similar seasonal pattern, plus partial recovery of the new centers' occupancy through the year: FY2026E normalized earnings ≈ 170–200M SAR EPS range = 170/44.3 to 200/44.3 = 3.84 – 4.51 SAR Step 3 — Multiple selection (the judgment call) Saudi healthcare peers trade roughly between ~20x (mature operators) and ~35x+ (premium growth like Al Habib). Almoosa sits below the premium tier: mid-cap, single-region, currently in margin compression. I assigned a fair P/E band of 24–28x — a discount to the sector leaders, a premium to no-growth operators. Method 1 (Comps): 3.84 × 24 = 92 → 4.51 × 28 = 126 SAR Step 4 — Forward exit value (capturing the expansion) Method 1 punishes the company for facilities that consume costs today but produce revenue tomorrow. So Method 2 values the completed platform: Assumption: third Al-Ahsa center + new Khobar specialist hospital lift bed capacity by roughly half, gross margin reverts to ~31%. Projected FY2028 normalized profit: 280–320M SAR → EPS 6.3–7.2. Exit multiple: 26x (midpoint of the fair band, since by 2028 it's a proven grower). Exit value (2028) = 6.3×26 to 7.2×26 ≈ 164 – 188 SAR Step 5 — Discounting to present value Discount rate: 9.5% — a cost-of-equity proxy built roughly as: Saudi risk-free ~5% + equity risk premium ~5.5% × beta ~0.8 for a defensive healthcare operator. Discount period: 2 years (mid-2026 → mid-2028). PV = Exit value / (1.095)² = 164/1.199 to 188/1.199 ≈ 137 – 157 SAR Step 6 — Triangulation (weighting the methods) MethodRangeWeightRationaleNormalized comps92–126~30%Real but punishes transition yearDiscounted exit multiple137–157~50%Best fits an expansion-phase assetStreet target169–192~20%Single-analyst coverage, low reliability Weighted blend → fair value ≈ 140–155 SAR, midpoint ~148. Step 7 — Sensitivity (the honesty layer) The output's fragility, quantified: ±1 point on the P/E multiple → ±~4.5 SAR on fair value ±10M SAR on the earnings estimate → ±~6 SAR ±1% on the discount rate → ±~3 SAR on the Method-2 leg So the defensible claim is never "the stock is worth 148.00" — it's "fair value clusters in the 140s under reasonable assumptions, and the dominant swing variable is gross margin recovery, not the discount rate." One final point of intellectual honesty: Steps 2, 3, and 4 each contain a judgment of mine (seasonality pattern, multiple band, 2028 earnings power). A different analyst with equally defensible inputs could land at 120 or at 170. That's not a flaw of this model specifically — it's the nature of valuation. The method's value isn't the point estimate; it's that it forces every disagreement into a specific, testable assumption you can monitor quarter by quarter.