NETCARE LIMITED - Pre-Close Trading Update and Trading Statement

Pre-Close Trading Update and Trading Statement

NETCARE LIMITED
(Registration number 1996/008242/06)
Code: NTC
ISIN: ZAE000011953
("Netcare")


PRE-CLOSE TRADING UPDATE AND TRADING STATEMENT


PRE-CLOSE TRADING UPDATE

The purpose of this trading update is to provide shareholders with an update on Netcare’s trading
operations in Southern Africa and the UK for the period from 1 April 2016 to date.

SA: Hospitals and Emergency Services
Activity levels in H2 to the end of August 2016 have grown at a higher rate of 6.3% (as compared to
2.8% achieved in H1), giving a year-to-date growth in patient days as of the end of August 2016 of
4.4%. The division’s activity levels for the month of September 2016 remain in line with seasonal
expectations.

Given that the second half would bear the full impact of both lower tariff inflation and higher wage
costs, along with the continued trend towards medical admissions, it was a challenging target for the
business to maintain the full year EBITDA margins at the H1 level of 22.6%. Therefore, we are
pleased to advise that the business has achieved an EBITDA margin at H1 levels for trading through
to the end of August 2016.

Revenue per patient day increased by 4.9% to August 2016. Growth in revenue per patient day has
been impeded by two factors:
   * 2016 tariff inflation, even though ahead of historic CPI at that time, was negotiated in a very
     low inflationary environment.
   * The unusually large shift in surgical to medical mix, which has persisted in H2. The business
     has experienced a shift of 1.3% in admissions from surgical to medical cases in year-to-date
     trading through to the end of August 2016. While surgical cases continue to represent over
     60% of admissions, there has been a higher rate of growth in medical admissions. The
     revenue earned from a medical admission is substantially less than that from a surgical
     admission, thereby diluting the rate of growth in revenue per patient day.

With regard to margins compared to last year:
   * Cost inflation, specifically with regard to wages, is ahead of price inflation.
   * Medical admissions also yield a lower margin than surgical admissions and therefore the
     higher rate of growth in medical admissions has continued to impact margins in H2.
   * The business continues to focus on its cost base through various efficiency initiatives,
     including the tight management of nursing acuity and staffing, energy consumption
     management and efficient procurement. However, the savings delivered by these initiatives
     are not sufficient to absorb the countervailing margin pressures.

Full week occupancy levels have recovered from the 64.4% reported for H1 as the new capacity
added in late 2015 gains traction. Full week occupancy levels improved to 66.9% for the trading
period through to end of August 2016, as compared to 67.8% for the 2015 financial year in full. The
two new hospitals in Polokwane and Pinehaven continue to perform well, achieving monthly
occupancy levels approaching 60% in recent months. Consequently, the impact on the Division’s
EBITDA margin from these new facilities will be negligible over the full 2016 financial year.

The specialist base has grown by a net 155 doctors for the year to date. Eighty-nine new beds were
added during the year and 29 under-utilised beds were converted to disciplines where there is
higher demand. The new Netcare Christiaan Barnard Memorial Hospital is scheduled to open in
December 2016.

SA: Primary Care
The Division’s EBITDA margin for the full financial year is expected to remain in line with the first
half. A new day theatre in Kimberley is due to open shortly, with projects for the new day theatre
and sub-acute facilities in Upington, Hillcrest, Cape Town and Richards Bay progressing well.

UK: BMI Healthcare
Inpatient and day caseload for the 11 months to August 2016 has increased by 1.2%.

In line with the half-year guidance, NHS caseload has continued to grow, increasing by 6.7% by the
end of August 2016. NHS growth is largely driven by e-Referrals (previously called Choose & Book),
which grew by 9.6% to the end of August 2016 and resulted in NHS-funded patients now comprising
in excess of 40% of total caseload.

Total privately funded caseload decreased by 2.4% to August 2016.
* Caseload in the PMI segment is still declining, albeit at a slower rate in the second half.
* Self-pay activity has continued to grow as NHS waiting lists, packaged pricing and targeted
    marketing encourages more patients to self-fund healthcare needs.

Outpatient activity has experienced solid growth, boosted by an increasing range of outpatient
services.

Notwithstanding the growing mix of NHS-funded activity, the EBITDA margin through to August 2016
has remained relatively stable against the reported half-year margin of 6.8%. Trading activity for the
month of September 2016 remains in line with recent trends.

Group results
As reported at the half year, the SA business now carries the additional depreciation costs of the
new capacity introduced in FY2015, and accordingly the full year depreciation charge will be higher
than the prior year.

Net interest paid will also be higher than the prior year due to the interest costs related to the
funding of the 2015 SA bed expansion program and the exchange rate impact on the interest income
earned from Netcare’s economic interest in the debt of BMI Healthcare.

UK: Rent reduction
Netcare’s UK subsidiary, BMI Healthcare, is currently engaged in discussions with its major external
landlord (“PropCo”) with regard to a rent reduction transaction. These discussions have progressed
to the point where key heads of terms, which are non-binding, have been agreed. Any transaction
will be subject to a number of approvals from stakeholders and third parties. Whilst there can be no
assurances, we expect to be in a position to make a formal announcement on the terms of a legally
binding transaction in the near future. The bulk of the funding for the transaction will be raised by
BMI Healthcare through a new debt facility. BMI Healthcare will simultaneously refinance its existing
debt and establish an appropriate long-term capital structure. Only limited funding will be required
from BMI Healthcare’s shareholders and Netcare intends to fund its pro rata share from existing
resources. We wish to remind you that the terms of the rent deal remain subject to confidentiality
provisions and we will provide further information to the market as soon as we are in a position to
do so.

TRADING STATEMENT

In terms of paragraph 3.4 (b) of the JSE Listings Requirements, a listed company is required to
publish a trading statement as soon as it is satisfied that a reasonable degree of certainty exists that
the financial results for the period to be reported upon next will differ by at least 20% from those of
the previous corresponding period.

The accounting implications of the above-mentioned rent reduction transaction are currently under
review. However, it is anticipated that the existing Retail Price Index (“RPI”) swaps, which are related
to the existing long-term leases, will be eliminated as part of the rent reduction transaction.
Consequently, the assumptions underlying the basis of valuing the RPI swap obligations through to
maturity in 2031 have changed from those applicable at the previous reporting period. This will give
rise to a material, non-cash fair value accounting charge that will be recognized in the 2016 year-end
accounts. As a reminder, the RPI swaps were initially entered into in 2008 in conjunction with the
existing leases and act, together with the leases, to deliver PropCo with a predetermined 2.5%
annual increase in rental income.

The exact value of this non-cash, fair value accounting charge is only capable of determination after
the year-end, but it is reasonably certain that it will result in a decrease in the current year’s
Earnings per Share (“EPS”) and Headline Earnings per Share (“HEPS”) of greater than 20%.
Accordingly, Netcare advises that, for reasons that relate solely to the factors above, earnings are
anticipated to be at least 20% (R485 million) and EPS at least 20% (35.8 cents) less than those for the
same period in the previous financial year of 178.9 cents. Headline earnings are anticipated to be at
least 20% (R485 million) and HEPS at least 20% (35.8 cents) less than those for the same period in
the previous financial year of 174.1 cents.

Shareholders are reminded that this fair value accounting charge has no commercial effect on the
financial status of Netcare as it is non-cash and unrealized at the financial year-end. Furthermore, in
addition to the mandatory EPS and HEPS metrics, Netcare also publishes an “adjusted HEPS” figure,
which it believes to be a more appropriate indicator of sustainable performance, and which excludes
the impact of non-cash fair value movements on swap instruments. Netcare’s “adjusted HEPS” will
not be adversely affected by this non-cash, fair value accounting charge and is expected to reflect
growth similar to the performance reported in the first half.

Shareholders are advised that a further trading statement will be issued as soon as there is a
reasonable degree of certainty as to the magnitude of the non-cash, fair value accounting charge.

The above information provided in both the trading update and trading statement has not been
reviewed or reported on by Netcare’s external auditors.

Johannesburg
27 September 2016
Sponsor
Deutsche Securities (SA) Proprietary Limited

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