Tuesday, 02 December 2014 - 20:00
Seed weekly - Netcare Ltd ? Investors in Safe Hands
Private hospital group Netcare Ltd offers a comprehensive network of healthcare services in South Africa and the United Kingdom. The group is the second-largest healthcare provider by market cap listed on the JSE, and is currently trading near all-time highs after delivering a price return of 47% over the last year.
Netcare was initially formed to combine the operations of Clin-Run, a specialist hospital promotion and management company, and the interests of founder Dr Jack Shevel. The group was listed on the JSE in December 1996 with 6 owned and managed hospitals.
A series of acquisitions followed, including Clinic Holdings in 1997 that added 25 hospitals to the group, and Excel Medical Holdings in 1998 that added another 10.
In 2001 Netcare acquired the Medicross group, and also expanded into the UK by providing specialised healthcare services to the NHS on contract. A controlling interest in the General Healthcare Group in the UK - then comprising 49 hospitals - was acquired in 2006.
Netcare operates 54 hospitals (9,424 beds), 87 primary healthcare facilities and 83 retail pharmacies in SA. In addition, the group operates 57 hospitals (2,788 beds) in the UK and 1 hospital and 4 primary healthcare facilities in Lesotho.
Netcare recently released its annual results for the year ended 30 September 2014, and reported strong growth in adjusted headline earnings per share (+19.5%), group cash flow from operations (+15.6%) and revenue (+16.1%). In addition, the final dividend increased by 18.5% to 48 cps.
SA operations increased revenue by 7.4%, with this growth being largely organic. The operating margin improved from 17.8% to 19.1%, reflecting process efficiencies and cost controls implemented by management. Full week occupancy of hospital beds improved to 69%, while 89 new beds were commissioned for the year.
An amount of R 2bn is allocated for capital investment in 2015, with plans to add another 510 beds to the network via new hospitals in Polokwane and Pinehaven and the acquisition of Ceres Private Hospital.
Netcare is employing a comprehensive long-term strategy to reduce its electricity usage and costs, and is launching several energy efficiency and renewable energy projects across the group. A cumulative saving of R 1bn on energy costs over the next 10 years is expected from these measures.
In the UK, revenue increased by 4.5% in pounds, with the NHS caseload increasing by 10% over the year and private demand remaining under pressure.
The percentage of total group revenue generated from the UK operations has increased from 45% to 49% over the reporting period, making Netcare a true rand hedge for SA-based investors.
In constant currency terms, the group’s revenue and earnings growth is not as impressive, with the impact of the rand weakening by 12% against the pound over the reporting period being very favourable for the group’s rand-based reporting.
Fundamentals and Outlook
Management expects demand for private hospital services in SA to remain strong, while the increased patient capacity generated by the planned capex projects should pull through to the bottom line over time. The energy efficiency programme should reduce ongoing costs over the longer term.
The UK healthcare market is underpinned by strong demand drivers, including population growth and increased population ageing projected to 2032. The caseload from private clients should increase again as the UK economic recovery gathers momentum, while the NHS is also expected to increase contracting to the private sector.
Netcare currently trades at a PE of 23, which is 35% more expensive than the ALSI’s 17, while the dividend yield is 2.2% compared to the ALSI’s 3.0%.
Netcare is currently held in the Seed Equity Fund at a 2.5% weight as a result of strong price and earnings momentum.
Cor van Deventer
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