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Summarised Audited Group Results for the year ended 30 September 2016
Netcare Limited
("Netcare", "the Company" or "the Group")
Registration number: 1996/008242/06 (Incorporated in the Republic of South Africa)
JSE share code: NTC ISIN ZAE000011953
Summarised Audited Group Results for the year ended 30 September 2016
FINANCIAL HIGHLIGHTS
Group EBITDA up 11.2%
R5 539 million
Normalised profit after taxation up 19.1%
R2 906 million
Adjusted HEPS up 5.6%
199.5 cents
Final dividend per share up 5.6%
57.0 cents
COMMENTARY
Key financial results
Year ended
30 September 30 September
Rm 2016 2015 % change
Revenue 37 796 33 711 12.1
EBITDA 5 539 4 981 11.2
EBITDA margin 14.7% 14.8%
Operating profit 4 148 3 728 11.3
Operating profit margin 11.0% 11.1%
Normalised profit before taxation 3 872 3 375 14.7
Normalised taxation (966) (936)
Normalised profit after taxation 2 906 2 439 19.1
Exceptional items:
RPI swap instruments fair value adjustment (1 988)
Taxation effect 130
Profit for the year 1 048 2 439
OVERVIEW
The Netcare Group is pleased to report an increase in EBITDA of 11.2% and growth in normalised profit after taxation of 19.1% for the year ended 30
September 2016. Adjusted headline earnings per share ("adjusted HEPS") grew by 5.6% to 199.5 cents (2015: 189.0 cents). Our operations in South Africa
("SA") delivered solid results, with activity boosted by the prior year's investment in 584 new beds. Our business in the United Kingdom ("UK"), BMI
Healthcare ("BMI"), delivered a credible performance in a challenging trading environment.
The reported Group results were impacted by a significant, but technical, non-cash fair value accounting charge arising on the Retail Price Index ("RPI")
swap instruments related to existing long-term property leases in the UK, which are the subject of a pending rent reduction transaction ("UK Rent
Transaction"). Further details of the valuation of the RPI swap instruments and the UK Rent Transaction are provided later in this report. Given the
exceptional nature of the RPI swap instrument fair value accounting charge, its impact has been separately disclosed and the commentary that follows
refers to normalised results exclusive of this non-cash charge.
The accounting policies applied in preparing the audited Group financial statements are consistent in all material respects with those applied in the prior
year ended 30 September 2015.
GROUP FINANCIAL REVIEW
Financial performance
Group revenue rose 12.1% to R37 796 million (2015: R33 711 million). Currency conversion accounted for R2 240 million of this increase. The average
exchange rate of R21.04 used to convert UK income and expenditure during the 2016 financial year was 13.4% weaker than the average exchange rate of
R18.55 in the prior year.
Group earnings before interest, tax, depreciation and amortisation ("EBITDA") grew 11.2% to R5 539 million (2015: R4 981 million). Currency conversion
accounted for R149 million of the increase. Operating profit improved 11.3% to R4 148 million (2015: R3 728 million).
Net financial expenses were lower at R433 million compared to R467 million in the prior year.
Normalised profit before taxation increased 14.7% to R3 872 million (2015: R3 375 million). The Group's normalised taxation expense increased to R966
million (2015: R936 million), representing an effective tax rate of 24.9% (2015: 27.7%). Normalised profit after taxation rose 19.1% to R2 906 million (2015:
R2 439 million).
Financial position and cash flow
Total assets at 30 September 2016 reduced by 3.2% to R30 659 million (2015: R31 664 million) as a result of a notable strengthening of the Rand against
the Pound Sterling. The closing exchange rate of R17.79 (2015: R20.94) contributed R2 210 million of the decrease. Total shareholders' equity decreased
8.9% to R13 009 million (2015: R14 281 million), affected by currency fluctuations and the after-tax impact of the exceptional non-cash RPI swap
instrument fair value accounting charge.
At 30 September 2016, the Group's net debt was R5 543 million (2015: R5 790 million). The net debt to EBITDA ratio improved to 1.0 times (2015: 1.2
times), driven largely by lower UK debt balances translated at lower exchange rates. Interest cover remained strong at 11.1 times (2015: 11.2 times).
In SA, net debt increased to R3 587 million from R3 292 million a year before. Net debt in the UK decreased to £110.0 million at 30 September 2016 from
£119.3 million at the prior year-end. The maturity date of the UK revolving credit facility of £36.0 million has been extended to March 2018.
Cash generated from the Group's operations rose 6.6% to R5 282 million (2015: R4 956 million) with a consistently strong cash conversion of 95.4 %.
The Group invested R2 822 million (2015: R2 653 million) in capital expenditure, including intangible assets. Ordinary dividends of R1 250 million (2015:
R1 166 million) were paid to shareholders and R74 million (2015: R211 million) to beneficiaries of our Health Partners for Life ("HPFL") broad-based black
economic empowerment trusts. Combined cash payments to shareholders, empowerment partners and revenue authorities amounted to R2 335 million
(2015: R2 539 million).
DIVISIONAL REVIEW
South Africa
Revenue increased 9.7% to R18 958 million (2015: R17 289 million). EBITDA grew 5.0% to R4 147 million (2015: R3 948 million) with margins of 21.9%
(2015: 22.8%). Operating profit rose 4.0% to R3 548 million (2015: R3 411 million) and adjusted HEPS increased 2.2% to 186.9 cents (2015: 182.9 cents).
Cash generated from operations was marginally lower at R4 120 million (2015: R4 150 million) with a cash conversion ratio of 99.3%. Capital expenditure,
including intangible assets, totaled R2 054 million (2015: R1 895 million).
Netcare remains committed to actively driving an enhanced quality and safety agenda throughout the organisation. We continue to monitor over 300 quality
outcomes and process measures aligned to the Quadruple Aim objectives of best patient outcome, best patient experience and cost effective care,
combined with excellent staff training and support. We are pleased to have shown continued year-on-year improvement in most of these key elements and
are grateful for the concentrated efforts of leadership, staff and all our stakeholders in collectively building on our vision of being leaders in the highest
quality of care.
Notable accolades during the year included:
2016/17 Ask Afrika Orange Index
Netcare won the 2016/17 Ask Afrika Orange Index Award in the private hospitals category and also achieved 6th place overall across all industries
measured. This is the first time that a company in the private hospital category featured among the Top 10. The index acknowledges customer service
excellence across various industries, with 135 companies across 33 industries having been benchmarked in the 2016/17 index.
Antimicrobial stewardship programme at Netcare hospitals
The achievements of a five-year pharmacist-driven antibiotic stewardship programme in reducing antibiotic usage across 47 Netcare hospitals were
highlighted in a research paper recently published in 2016 Lancet Infectious Diseases.
2016 PMR.africa Awards
Netcare St Augustine's and Netcare Christiaan Barnard Memorial hospitals each won a PMR.africa Diamond Arrow Award, the highest possible accolade,
in the category for private hospitals/clinics in KwaZulu-Natal and City of Cape Town/Cape Peninsula respectively.
2016 Top 100 Most Empowered JSE Listed Companies
Netcare has been ranked 16th overall in the 2016 Top 100 Most Empowered JSE Listed Companies Report.
2016 PMR.africa Diamond Arrow Award for Corporate Social Responsibility Initiatives
Netcare won the national Diamond Arrow Award for the Group's corporate social responsibility initiatives for the 4th consecutive year.
2016 FTSE/JSE Top 30 Responsible Investment Index
Netcare has been included in the 2016 FTSE/JSE Top 30 Responsible Investment Index.
2016 RobecoSAM Bronze Class Sustainability Award
Netcare achieved a Bronze Class distinction for its excellent sustainability performance, and has also been included in the 2016 RobecoSAM's 'The
Sustainability Yearbook', the world's most comprehensive publication on corporate sustainability for the second consecutive year.
Hospital and Emergency Services
Netcare experienced strong demand for its private healthcare services, despite low economic growth and a decline in total medical scheme beneficiaries
of 0.06% to 8.809 million at 31 December 2015 from 8.814 at the end of the previous calendar year (as reported by the Council for Medical Schemes).
Patient days grew by 4.7% compared to the prior year. Patient days grew by 2.4% excluding the growth from the new greenfield hospitals in Polokwane
and Pinehaven. The 584 new beds added in the prior year initially diluted occupancy levels, but excellent traction, especially at our new hospitals in
Polokwane and Pinehaven, resulted in occupancy levels for the year of 67.2% (2015: 67.8%), representing a strong recovery against the half-year
occupancy of 64.4%.
Revenue grew 10.3% to R17 780 million (2015: R16 119 million). Net revenue per patient day was up 5.2%, impacted by a shift from surgical to medical
cases of 1.6%. EBITDA increased 5.0% to R4 029 million (2015: R3 837 million) and EBITDA margins improved slightly from 22.6% in the first half to
22.7% for the full year (2015: 23.8%). Margins have been influenced by cost inflation which has exceeded price inflation during the year, as well as the
higher rate of growth experienced in medical admissions which yield a lower margin than surgical admissions. There has been continued focus on the
cost base through various efficiency initiatives, including tight management of staffing, reduction in energy consumption, efficient procurement and
automation of administrative processes. The savings delivered by these initiatives were, however, not sufficient to absorb the countervailing margin
pressures.
Operating profit grew by 4.0% to R3 469 million (2015: R3 335 million) and was influenced by higher depreciation charges arising from the greenfield
hospitals and brownfield beds added in 2015.
At 30 September 2016, the division had a total of 10 513 registered beds (2015: 10 421 beds). During the year, a further 92 beds were added to the
portfolio, including the new 21-bed uMhlanga Eye Institute in KwaZulu-Natal, which only started operating in October 2016.
The Netcare Christiaan Barnard Memorial Hospital ("CBMH") will relocate and commence operations from its new, state-of-the-art premises on the Cape
Town foreshore in early December 2016. This flagship hospital will form part of a world-class medical precinct and centre of excellence, the first of its kind
in SA, providing a comprehensive range of primary, secondary and tertiary medical, emergency, diagnostic and rehabilitative services. The new Netcare
CBMH will include 248 beds, 11 theatres, 2 cardiac catheterisation laboratories and an Accident and Emergency Trauma unit.
Primary Care
There was stable demand in general practitioner and dental patient visits across our national network of Medicross family medical and dental centres,
while Prime Cure delivered a solid performance. Revenue was up 0.7% to R1 178 million (2015: R1 170 million) and EBITDA rose 6.3% to R118 million
(2015: R111 million). The EBITDA margin improved from 9.5% to 10.0%.
Medicross has a large national day clinic network comprising 14 facilities, including a new day clinic in Kimberley which was completed in September
2016 and operations commenced in mid-October 2016. The division is focused on expanding its offering in the day clinic and sub-acute market. In this
regard Medicross acquired a 16-bed sub-acute facility in Pietermaritzburg and a 20-bed sub-acute facility in Amanzimtoti during the year. Plans are in
place for further expansion of our footprint in the provision of these services. In the 2017 and 2018 financial years, Medicross will be opening three new
day clinics in Upington, Cape Town and Richards Bay, as well as three new sub-acute facilities in Hillcrest, Cape Town and Richards Bay.
Pharmacy outsourcing agreement
The outsourcing of Netcare's hospital retail front shop operations and the Medicross retail pharmacies to Clicks Group Limited ("Clicks") was approved by
the Competition Commission and Competition Tribunal on 11 November 2016. Clicks will take over the 37 Medicross pharmacies on 1 December 2016 and
the retail (front shop) pharmacy operations within 45 Netcare hospitals with effect from 1 February 2017. The dispensing of prescriptions in the hospital
pharmacies does not form part of the agreement and will remain within the hospitals' operations. The arrangement with Clicks will enable Netcare to
provide an enhanced retail offering to patients, consumers and other stakeholders. The outsourcing agreement will not have a material impact on the
earnings or financial position of the Group.
Acquisition of Akeso Clinics
On 15 November 2016 the Netcare Board approved the proposed acquisition by Netcare of Akeso Clinics, which is a national group of 12 dedicated
mental healthcare facilities comprising 873 beds. This transaction is subject to the usual regulatory approvals.
SA private healthcare market inquiry
The Healthcare Market Inquiry ("HMI") into the functioning of the private healthcare market commenced in 2014. Netcare has been actively engaged
throughout the inquiry and made comprehensive submissions to the HMI panel in 2014, 2015 and 2016. The HMI is running beyond its initial deadline for
completion of the inquiry. On 10 November 2016 the HMI advised that it intends publishing a series of documents during November and December 2016,
which will be followed by a period for public comment, closing on 31 January 2017. An updated timeline for the release of provisional and final reports is
expected on 1 December 2016.
United Kingdom
BMI's total patient episodes, comprising all inpatient, daycase and outpatient activity, grew by 3.2%. Within this, inpatient and day case activity grew by
1.1%. Growth in demand for National Health Service ("NHS") caseload continued increasing by 6.6% in total (in line with overall market trends), with strong
demand increasing e-Referrals by 9.5%, offset by a 5.3% contraction in spot purchasing. NHS-funded caseload now comprises 41.6% (2015: 39.5%) of
total inpatient and day case activity. While there was a 1.8% rise in demand in the Private Medical Insurance ("PMI") market in 2015, there has been a
continuing decline in medical cover payouts to acute hospitals and clinics over the past 5 years. Private funded inpatient and daycase caseload continued
to decline, albeit at a slower rate of 3.4%, due to ongoing funder cost management. Self-pay caseload increased 2.8% and is being driven through
packaged pricing and targeted marketing campaigns. In line with global trends, a greater number of procedures and services are taking place in an
outpatient environment and this area of activity grew by 3.7% in the year.
Revenue of £895.5 million was 1.1% higher than the prior year (£886.0 million), included within which was the continued shift in funder mix from private
patients to NHS. EBITDA before non-recurring items declined by 0.3% to £63.8 million (2015: £64.0 million). In the current year there was a non-recurring
credit of £2.6 million comprising a fair value gain of £0.6 million arising on acquisition of control of a former associate and the reversal of an impairment
of £2.0 million. The prior year included net non-recurring costs of £8.8 million constituting business restructuring costs of £11.9 million offset by a £3.1
million fair value gain arising on acquisition of control of a former associate. EBITDA rose 20.3% to £66.4 million (2015: £55.2 million) and operating profit
improved 71.9% to £28.7 million (2015: £16.7 million).
Capital investment, including intangible assets and the purchase of the remaining stake in an imaging joint venture, increased to £40.1 million (2015: £39.4
million) directed at both improving current hospital facilities and infrastructure and driving revenue generation.
General Healthcare Group PropCo 2 reported an increase in attributable earnings to £1.7 million (2015: £0.4 million), inclusive of a deferred taxation credit
of £0.7 million arising from changes in the UK tax rate.
RPI swaps and UK Rent Transaction
BMI leases 35 of its hospital properties from various subsidiary entities of its major external landlord, Hospital Topco. The leases on these properties have
annual rental uplifts linked to RPI. BMI also holds certain RPI swap instruments which, combined with the leases, achieve the economic effect of a fixed
2.5% rental uplift.
In October 2016 BMI and Hospital Topco agreed heads of terms for a potential transaction to reduce BMI's annual rent-related obligations. The parties
remain constructively engaged in moving the deal to completion. A UK Rent Transaction will be subject to consent from certain lenders of Hospital Topco,
as well as the refinancing of BMI.
It was recently disclosed that BMI is in the process of refinancing its existing debt facilities, inclusive of the funding required for the UK Rent Transaction.
BMI reported gross debt of £167.9 million and net debt of £110.0 million at 30 September 2016. The proposed refinancing consists of: (1) a senior term
loan facility of up to £285 million; (2) a revolving credit facility of up to £75 million; and (3) a second lien facility of £66 million in which Netcare would hold
a contractual economic interest.
In terms of IFRS, the RPI swap instruments (related to the 35 property leases described above) are required to be carried at their fair market value at each
reporting date. The valuation of these instruments is sensitive to future RPI expectations and also the expected timing and amount of any swap instrument
termination payment. The future RPI rates used in the valuation of the RPI swap instruments have been based on future forecasts available in the market.
The impact of the termination date was estimated using a weighted average of probabilities of the cash flows expected to arise at possible termination
dates. However, as a consequence of the heads of terms agreed for the UK Rent Transaction, the estimate of the termination dates and amounts used in
valuing the RPI swap instruments changed from the corresponding estimates applicable at previous reporting dates. The RPI swap instruments valuation
as at 30 September 2016 of R2 129 million (£119.7 million) reflects the mark-to-market valuations by the counterparty to the RPI swap instruments.
Therefore, as a consequence of the UK Rent Transaction and as set out in note 5 of the summarised Group financial results, the Group recorded a
significant non-cash fair value accounting charge of R1 988 million (£107.9 million), before taxation, in the year to 30 September 2016 in respect of the RPI
swap instruments. As mentioned previously, given the exceptional nature of the RPI swap instrument fair value accounting charge, its impact has been
separately disclosed and the commentary refers to normalized results exclusive of this non-cash charge.
In the period from 1 October 2016 to 31 October 2016, the mark-to-market value of the RPI swap instruments fell to R1 188 million (£72.1 million) reflecting
movements in market expectations of future inflation indices.
OUTLOOK
Demand for our private healthcare services in SA is expected to remain resilient, despite low growth in both the broader economy and in levels of formal
employment. The year ahead will see further medical schemes introduce sizable lower cost 'efficiency options'. Netcare has secured participation of its
hospitals in all of the restricted networks of approved hospital facilities for the 'efficiency options' that have been announced to date. The higher
prevalence of 'efficiency options' will result in further margin pressure in the 2017 financial year. We will continue to seek efficiencies in our cost base and
invest in IT and other technology projects aimed at partially mitigating margin pressures.
Planned capital expenditure in 2017 of approximately R1.7 billion is expected covering, inter alia, the construction of 49 new beds, finalisation of the
relocation of Netcare CBMH, a substantial expansion of Netcare Milpark Hospital and growing the footprint of our oncology, day clinic and sub-acute
networks.
In the UK, although there has been greater economic uncertainty since the June 2016 outcome of the referendum, whereby British citizens voted to leave
the European Union, there has been no measurable impact on the business to date. There is further opportunity in the year ahead for growth in NHS
caseload through the entrenched e-Referral system, while the rising NHS demand and growing funding constraints suggest that local contracting (spot
purchasing) is also likely to pick up. Growing NHS waiting lists, along with packaged pricing and targeted marketing initiatives, are expected to encourage
more patients to self-fund their healthcare needs. The prevailing pressures on the PMI market are expected to continue. Further efficiencies will be
pursued focused on re-engineering patient pathways, staffing optimisation and procurement savings. There will be targeted investment to promote growth
in complexity and acuity and the introduction of new service lines; the business expects to spend approximately £44 million on capital projects in the year
ahead.
DECLARATION OF FINAL DIVIDEND NUMBER 15
Notice is hereby given that a gross final dividend of 57.0 cents per ordinary share was declared in respect of the financial year ended 30 September
2016. The dividend has been declared from income reserves and is payable to shareholders recorded in the register at the close of business on Friday, 27
January 2017. The number of ordinary shares (inclusive of treasury shares) in issue at date of this declaration is 1 461 509 779. The dividend will be
subject to a local dividend withholding tax at a rate of 15%, which will result in a net final dividend to those shareholders not exempt from paying dividend
withholding tax of 48.45 cents per ordinary share and 57.0 cents per ordinary share for those shareholders who are exempt from dividend withholding tax.
The Board has confirmed by resolution that the solvency and liquidity test as contemplated by the Companies Act 71 of 2008 has been duly considered,
applied and satisfied.
The salient dates applicable to the final dividend are as follows:
Last day to trade cum dividend Tuesday, 24 January 2017
Trading ex-dividend commences Wednesday, 25 January 2017
Record date Friday, 27 January 2017
Payment date Monday, 30 January 2017
Share certificates may not be dematerialised nor rematerialised between Wednesday, 25 January 2017 and Friday, 27 January 2017, both dates inclusive.
On Monday, 30 January 2017, the dividend will be electronically transferred to the bank accounts of all certificated shareholders. Holders of
dematerialised shares will have their accounts credited at their participant or broker on Monday, 30 January 2017.
Netcare Limited's tax reference number is 9999/581/71/4.
On behalf of the Netcare Board
Meyer Kahn Non-executive Chairman
Richard Friedland Chief Executive Officer
Keith Gibson Chief Financial Officer
Sandton
17 November 2016
GROUP STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 30 SEPTEMBER
%
Rm Notes 2016 2015 change
Revenue 37 796 33 711 12.1
Cost of sales (21 312) (18 948)
Gross profit 16 484 14 763 11.7
Other income 457 498
Administrative and other expenses (12 793) (11 533)
Operating profit 2 4 148 3 728 11.3
Investment income 3 404 367
Financial expenses 4 (777) (700)
Other financial losses - net 5 (2 048) (134)
Attributable earnings of associates 100 66
Attributable earnings of joint ventures 57 48
Profit before taxation 1 884 3 375 (44.2)
Taxation 6 (836) (936)
Profit for the year 1 048 2 439 (57.0)
Attributable to:
Owners of the parent 1 667 2 412
Preference shareholders 52 49
Profit attributable to shareholders 1 719 2 461 (30.2)
Non-controlling interest (671) (22)
1 048 2 439 (57.0)
Earnings per share (cents)
Basic 122.6 178.9 (31.5)
Diluted 120.6 174.8 (31.0)
Total dividend per share (cents) 95.0 92.0 3.3
GROUP STATEMENT OF OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER
Rm 2016 2015
Profit for the year 1 048 2 439
Items that may not subsequently be reclassified to profit or loss - (88)
Remeasurement of defined benefit obligation - (123)
Taxation on items that may not subsequently be reclassified to profit or loss - 35
Items that may subsequently be reclassified to profit or loss (1 142) 912
Effect of cash flow hedge accounting (15) 44
Change in the fair value of cash flow hedges (36) 7
Reclassification of cash flow hedge accounting reserve 21 37
Effect of translation of foreign entities (1 131) 878
Taxation on items that may subsequently be reclassified to profit or loss 4 (10)
Other comprehensive (loss)/income for the year (1 142) 824
Total comprehensive (loss)/income for the year (94) 3 263
Attributable to:
Owners of the parent 1 005 2 814
Preference shareholders 52 49
Non-controlling interest (1 151) 400
(94) 3 263
GROUP STATEMENT OF FINANCIAL POSITION
AT 30 SEPTEMBER
Rm Notes 2016 2015
ASSETS
Non-current assets
Property, plant and equipment 14 421 13 622
Goodwill 3 942 4 482
Intangible assets 314 397
Equity-accounted investments, loans and receivables 7 2 564 2 545
Financial assets 8 34 57
Deferred lease assets 21 16
Deferred taxation 1 318 1 597
Total non-current assets 22 614 22 716
Current assets
Loans and receivables 7 58 71
Inventories 1 019 1 107
Trade and other receivables 4 972 5 192
Taxation receivable 16 19
Cash and cash equivalents 1 980 2 551
8 045 8 940
Asset classified as held for sale - 8
Total current assets 8 045 8 948
Total assets 30 659 31 664
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital and premium 4 197 4 033
Treasury shares (3 768) (3 713)
Other reserves 2 465 3 090
Retained earnings 7 283 6 902
Equity attributable to owners of the parent 10 177 10 312
Preference share capital and premium 644 644
Non-controlling interest 2 188 3 325
Total shareholders' equity 13 009 14 281
Non-current liabilities
Long-term debt 9 6 132 6 104
Financial liabilities 8 2 158 224
Post-retirement benefit obligations 427 400
Deferred lease liabilities 124 118
Deferred taxation 1 207 1 633
Provisions 113 150
Total non-current liabilities 10 161 8 629
Current liabilities
Trade and other payables 6 012 6 403
Short-term debt 9 1 390 2 162
Financial liabilities 8 5 4
Taxation payable 81 110
Bank overdrafts 1 75
Total current liabilities 7 489 8 754
Total equity and liabilities 30 659 31 664
GROUP STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 SEPTEMBER
Rm 2016 2015
Cash flows from operating activities
Cash received from customers 37 561 33 523
Cash paid to suppliers and employees (32 279) (28 567)
Cash generated from operations 5 282 4 956
Interest paid (678) (600)
Taxation paid (950) (1 104)
Ordinary dividends paid by subsidiaries (9) (9)
Ordinary dividends paid (1 250) (1 166)
Preference dividends paid (52) (49)
Distributions to beneficiaries of the HPFL B-BBEE trusts (74) (211)
Net cash from operating activities 2 269 1 817
Cash flows from investing activities
Purchase of property, plant and equipment (2 789) (2 641)
Additions to intangible assets (33) (12)
Proceeds on disposal of property, plant and equipment and intangible assets 60 68
Acquisition of businesses (18) (35)
Acquisition of business loans (25) -
Cash related to acquisition of businesses 1 -
Proceeds from disposal of businesses 20 3
Decrease/(increase) in investments and loans 119 (145)
Interest received 161 152
Dividends received 34 12
Increase in equity interest from associates and joint ventures to subsidiaries (43) (49)
Net cash from investing activities (2 513) (2 647)
Cash flows from financing activities
Proceeds from issue of ordinary shares 23 37
Proceeds on disposal of treasury shares 101 300
Long-term debt raised 356 828
Short-term debt (repaid)/raised (572) 278
Acquisition of non-controlling interests 9 -
Net cash from financing activities (83) 1 443
Net (decrease)/increase in cash and cash equivalents (327) 613
Translation effects on cash and cash equivalents of foreign entities (170) 157
Cash and cash equivalents at the beginning of the year 2 476 1 706
Cash and cash equivalents at the end of the year 1 979 2 476
Consisting of:
Cash on hand and balances with banks 1 980 2 551
Short-term money market borrowings and bank overdrafts (1) (75)
1 979 2 476
SUMMARISED GROUP STATEMENT OF CHANGES IN EQUITY
AT 30 SEPTEMBER
Equity
Ordinary Cash flow Foreign attributable Preference Total
share hedge currency to owners share Non- share-
capital and Treasury accounting translation Other Retained of the capital and controlling holders'
Rm premium shares reserve reserve reserves earnings parent premium interest equity
Balance as at 30 September 2014 962 (735) (19) 2 172 407 5 859 8 646 644 2 882 12 172
Shares issued during the year 37 - - - - - 37 - - 37
Sale of treasury shares - 56 - - - 244 300 - - 300
Restructure of HPFL B-BBEE trusts 3 034 (3 034) - - - (53) (53) (53)
Share-based payments reserve movements - - - - 39 - 39 - - 39
Tax recognised in equity - - - - - (90) (90) - - (90)
Preference dividends paid - - - - - - - (49) - (49)
Dividends paid - - - - - (1 166) (1 166) - (9) (1 175)
Distributions to beneficiaries of the HPFL B-BBEE trusts - - - - - (211) (211) - - (211)
Increase in equity interest in subsidiaries - - - - - (4) (4) - 52 48
Total comprehensive income for the year - - 22 469 - 2 323 2 814 49 400 3 263
Balance as at 30 September 2015 4 033 (3 713) 3 2 641 446 6 902 10 312 644 3 325 14 281
Shares issued during the year 164 (141) - - - - 23 - - 23
Sale of treasury shares - 86 - - - 15 101 - - 101
Share-based payments reserve movements - - - - 33 - 33 - - 33
Tax recognised in equity - - - - - 35 35 - - 35
Preference dividends paid - - - - - - - (52) - (52)
Dividends paid - - - - - (1 250) (1 250) - (9) (1 259)
Distributions to beneficiaries of the HPFL B-BBEE trusts - - - - - (74) (74) - - (74)
Increase in equity interest in subsidiaries - - - - - (8) (8) - 23 15
Total comprehensive income for the year - - (17) (641) - 1 663 1 005 52 (1 151) (94)
Balance as at 30 September 2016 4 197 (3 768) (14) 2 000 479 7 283 10 177 644 2 188 13 009
HEADLINE EARNINGS
FOR THE YEAR ENDED 30 SEPTEMBER
%
Rm 2016 2015 change
Reconciliation of headline earnings
Profit for the period 1 048 2 439 (57.0)
Less:
Dividends paid on shares attributable to the Forfeitable Share Plan (7) (6)
Preference shareholders (52) (49)
Non-controlling interest 671 22
Earnings used in the calculation of basic earnings per share 1 660 2 406 (31.0)
Adjusted for:
(Profit)/loss on disposal of investments (net) (4) 1
Fair value gain on investments on acquisition of control (11) (77)
Net profit on disposal of property, plant and equipment and intangibles (18) (30)
Bargain purchase on acquisition of subsidiary (2) (1)
Reversal of impairment of investment (44) -
Reversal of impairment of property, plant and equipment (1) -
Tax effect of headline adjusting items 4 -
Non-controlling share of headline adjusting items 27 42
Headline earnings 1 611 2 341
Headline earnings adjusted for:
Ineffectiveness losses on cash flow hedges (1) -
Fair value losses on derivative financial instruments 2 029 109
Amount reclassified from the cash flow hedge accounting reserve 20 36
Recognition of loan impairment 3 4
Competition Commission costs 30 42
Restructure costs 2 223
Change in tax rate (34) -
Tax effect of adjusting items (149) (87)
Non-controlling share of adjusting items (810) (126)
Adjusted headline earnings 2 701 2 542
Headline earnings per share (cents) 119.0 174.1
Diluted headline earnings per share (cents) 117.1 170.0
Adjusted headline earnings per share (cents) 199.5 189.0 5.6
Summarised segment report
FOR THE YEAR ENDED 30 SEPTEMBER 2016
United
South Africa Kingdom
Hospital
and
Emergency Primary BMI
Rm services Care Total Healthcare Group
30 September 2016
Statement of profit or loss
Revenue 17 780 1 178 18 958 18 838 37 796
Attributable earnings of associates and joint ventures 71 - 71 86 157
EBITDA 4 029 118 4 147 1 392 5 539
Operating profit 3 469 79 3 548 600 4 148
Segment assets and liabilities
Total assets 17 963 12 696 30 659
Total liabilities (8 470) (9 180) (17 650)
30 September 2015
Statement of profit or loss
Revenue 16 119 1 170 17 289 16 422 33 711
Attributable earnings of associates and joint ventures 67 - 67 47 114
EBITDA 3 837 111 3 948 1 033 4 981
Operating profit 3 335 76 3 411 317 3 728
Segment assets and liabilities
Total assets 16 788 14 876 31 664
Total liabilities (8 384) (8 999) (17 383)
SUMMARISED NOTES TO THE GROUP FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 SEPTEMBER
1. Basis of preparation and accounting policies
The provisional summarised consolidated financial statements for the year ended 30 September 2016 have been prepared in compliance with the
Listings Requirements of the JSE Limited, the framework concepts and the measurement and recognition requirements of International Financial
Reporting Standards (IFRS), the requirements of the International Accounting Standards (IAS) 34, Interim Financial Reporting, SAICA Financial
Reporting Guidelines as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting
Standards Council and the Companies Act, No. 71 of 2008. These provisional summarised consolidated financial statements were compiled under
the supervision of Mr KN Gibson (CA) SA, Group Chief Financial Officer.
The accounting policies applied in the preparation of these results are in accordance with IFRS and are consistent in all material respects with those
applied in the audited financial statements for the year ended 30 September 2015.
The external auditors, Grant Thornton Johannesburg, have issued their opinion on the Group's consolidated financial statements for the year ended
30 September 2016. The audit was conducted in accordance with International Standards on Auditing. The auditor responsible for the audit is DS
Reuben. An unqualified audit opinion has been issued on the consolidated financial statements. The directors take full responsibility for the
preparation of the provisional summarised consolidated financial statements which have been extracted from and are consistent in all material
respects with the Group's consolidated financial statements, but are not audited. A copy of the audit report on the consolidated financial statements
is available for inspection at the Company's registered office. The auditor's report does not necessarily cover all the information contained in this
announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor's work, they should obtain
a copy of the auditor's unqualified audit report together with the Group financial information from the Company's registered office. Any reference to
future financial performance included in this announcement has not been audited and reported on by the Group's external auditors.
Rm 2016 2015
2. OPERATING PROFIT
After including:
Depreciation and amortisation (1 391) (1 253)
Operating lease charges (4 126) (3 625)
GHG Property Businesses (3 124) (2 683)
Other (1 002) (942)
3. INVESTMENT INCOME
Investment income on retirement benefit plan assets 65 77
Interest on bank accounts and other 339 290
404 367
4. FINANCIAL EXPENSES
Amortisation of arrangement fees (6) (7)
Interest on bank loans and other (424) (333)
Interest on promissory notes (248) (259)
Retirement benefit plan financial expenses (99) (101)
(777) (700)
5. OTHER FINANCIAL LOSSES - NET
Amount reclassified from the cash flow hedge accounting reserve (20) (25)
Fair value losses on inflation rate swaps to March 2016 (41) (107)
Fair value losses on inflation rate swaps to September 20161 (1 988) (2)
Ineffectiveness gains on cash flow hedges 1 -
(2 048) (134)
1 Non-cash fair value adjustment relating to the UK RPI swap instruments.
Netcare's UK subsidiary, BMI Healthcare (BMI), leases 35 of its hospital properties from various subsidiary entities
of its major external landlord, Hospital Topco. The leases on these properties have annual rental uplifts linked to
the Retail Price Increase (RPI). BMI also holds certain RPI swap instruments which, combined with the leases,
achieve the economic effect of a fixed 2.5% rental uplift.
In October 2016, BMI and Hospital Topco agreed heads of terms for a potential rent reduction transaction (UK
Rent Transaction). The parties remain constructively engaged in moving the deal to completion.
In terms of IFRS, the RPI swap instruments (related to the 35 property leases described above) are required to be
carried at their fair market value at each reporting date. The valuation of these instruments is sensitive to future RPI
expectations and also the expected timing and amount of any swap instrument termination payment. The future
RPI rates used in the valuation of the RPI swap instruments have been based on future forecasts available in the
market. The impact of the termination date was estimated using a weighted average of probabilities of the cash
flows expected to arise at possible future termination dates. However, as a consequence of the heads of terms
agreed for the UK Rent Transaction, the estimate of the termination dates and amounts used in valuing the RPI
swap instruments changed from the corresponding estimates applicable at previous reporting dates.
The RPI swap instruments valuation as at 30 September 2016 of R2 129 million (£119.7 million) reflects the
mark-to-market valuation by the counterparty. As a consequence of the UK Rent Transaction, the Group recorded
a significant, non-cash fair value accounting charge of R1 988 million (£107.9 million), before tax, in the year in
respect of the RPI swap instruments.
Rm 2016 2015
6. TAXATION
South African normal and deferred taxation
Current year (941) (891)
Prior years (2) -
Capital gains tax (6) -
Rate change (10) -
(959) (891)
Foreign normal and deferred taxation1
Current year 73 (30)
Prior years 30 (15)
Rate change 20 -
123 (45)
Total taxation per the statement of profit or loss (836) (936)
1 Included in this amount in the current year is a credit of R130 million relating to tax on
the UK RPI swap instruments non-cash fair value adjustment of R1 988 million
recognised in September 2016. Refer to note 5 and 8 for more information.
7. EQUITY-ACCOUNTED INVESTMENTS, LOANS AND RECEIVABLES
Non-current
Associated companies 721 668
Joint ventures 191 197
Loans and receivables 1 652 1 680
2 564 2 545
Current
Loans and receivables 58 71
2 622 2 616
Included in loans and receivables is an investment of R1 339 million (2015: R1 398 million) relating to a contractual
economic interest in the debt of BMI Healthcare.
Rm 2016 2015
8. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial assets
Interest rate swaps
South African Rand 19 38
Non-derivative financial asset
Investment in Cell Captive 15 19
34 57
Included in:
Non-current assets 34 57
Derivative financial liabilities
Interest rate swaps
South African Rand (15) (7)
Inflation rate swaps
South African Rand (19) (13)
Foreign currency1 (2 129) (208)
(2 163) (228)
Included in:
Non-current liabilities (2 158) (224)
Current liabilities (5) (4)
(2 163) (228)
1 Refer to note 12 for information on the change in the mark-to-market valuation of the RPI swap instruments
liability post year-end.
Fair value hierarchy
Financial instruments measured at fair value are grouped into the following levels based on the significance of the
inputs used in determining fair value:
Level 1: Fair value is derived from quoted prices (unadjusted) in active markets for identical instruments.
Level 2: Fair value is derived through the use of valuation techniques based on observable inputs, either directly or
indirectly.
Level 3: Fair value is derived through the use of valuation techniques using inputs not based on observable market
data.
The table below analyses the level applicable to financial instruments measured at fair value:
Rm Level 2 Level 3 Total
30 September 2016
Derivative financial assets
Interest rate swaps 19 - 19
Non-derivative financial asset
Cell Captive 15 - 15
34 - 34
Derivative financial liabilities
Interest rate swaps (15) - (15)
Inflation rate swaps (2 148) - (2 148)
(2 163) - (2 163)
30 September 2015
Derivative financial assets
Interest rate swaps 38 - 38
Non-derivative financial asset
Cell Captive 19 - 19
57 - 57
Derivative financial liabilities
Interest rate swaps (7) - (7)
Inflation rate swaps (13) (208) (221)
(20) (208) (228)
The Group has no financial instruments categorised as Level 1.
The RPI swap instruments have been reclassified from a Level 3 liability to a Level 2 liability as the valuation
method in the current year is based on fair value measurements that are observable indirectly, being derived from
market data. In the prior year the valuation also included certain weighted probability assessments as to the future
cash flows under the instrument. There were no transfers in the prior year.
Rm 2016 2015
9. DEBT
Long-term debt 6 132 6 104
Short-term debt 1 390 2 162
Total debt 7 522 8 266
Comprising:
Debt in South African Rand
Secured liabilities
Mortgage bond 1 2
Finance leases 27 29
Unsecured liabilities
Promissory notes and commercial paper in issue 2 000 3 000
Bank loans 2 502 1 602
Other 5 -
4 535 4 637
Debt in foreign currency
Secured liabilities
Finance leases 301 308
Bank loans 2 518 3 193
Arrangement fees (3) (10)
Unsecured liabilities
Accrued interest 171 138
2 987 3 629
7 522 8 266
Maturity profile
<1 1-2 2-3 3-4 >4
Rm Total year years years years years
30 September2016
Debt in South African Rand 4 535 258 1 610 552 602 1 513
Debt in foreign currency 2 987 1 132 435 1 312 53 55
7 522 1 390 2 045 1 864 655 1 568
30 September 2015
Debt in South African Rand 4 637 1 016 265 1 609 560 1 187
Debt in foreign currency 3 629 1 146 485 493 1 428 77
8 266 2 162 750 2 102 1 988 1 264
Rm 2016 2015
10. COMMITMENTS
Capital commitments 3 005 2 012
South Africa 2 671 1 888
United Kingdom 334 124
Operating lease commitments 48 536 57 653
South Africa 3 300 1 497
United Kingdom 45 236 56 156
11. CONTINGENT LIABILITIES
South Africa 49 99
12. EVENTS AFTER THE REPORTING PERIOD
UK Rent Transaction
In October 2016, BMI, its major external landlord and Hospital Topco, agreed heads of terms for a potential rent
reduction transaction in relation to existing long-term leases for 35 BMI hospitals. The RPI swap instruments
relating to these leases are expected to be eliminated as part of the arrangement. The parties remain
constructively engaged in moving the deal to completion. A UK Rent Transaction will require approval from the
boards of directors of BMI and Hospital Topco and will be subject to consent from certain lenders of Hospital
Topco, as well as the refinancing of BMI.
On 21 October 2016 it was announced that BMI is in the process of refinancing its existing debt facilities,
inclusive of the funding required for the UK Rent Transaction. BMI reported gross debt of £167.9 million and net
debt of £110.0 million at 30 September 2016. The proposed refinancing consists of: (1) a senior term loan facility
of up to £285 million; (2) a revolving credit facility of up to £75 million; and (3) a second lien facility of £66
million, in which Netcare would hold a contractual economic interest.
In the period from 1 October 2016 to 31 October 2016, the mark-to-market value of the RPI swap instruments fell
to R1 188 million (£72.1 million) reflecting movements in market expectations of future inflation indices.
Akeso Clinics
On 15 November 2016 the Netcare Board approved the proposed acquisition by Netcare of Akeso Clinics, which
is a national group of 12 dedicated mental healthcare facilities comprising 873 beds. This transaction is subject
to the usual regulatory approvals.
Pharmacy Outsourcing Agreement
The outsourcing of Netcare's hospital retail front shop operations and the Medicross retail pharmacies to Clicks
was approved by the Competition Commission and Competition Tribunal on 11 November 2016. Clicks will take
over the 37 Medicross pharmacies on 1 December 2016 and the retail (front shop) pharmacy operations within
45 Netcare hospitals with effect from 1 February 2017. The outsourcing agreement will not have a material impact
on the earnings or financial position of the Group.
The directors are not aware of any other matters or circumstances arising since the end of the financial year, not
otherwise dealt with in the Group's annual financial statements, which significantly affect the financial position at
30 September 2016 or the results of its operations or cash flow for the year then ended.
SALIENT FEATURES
2016 2015
Share statistics
Ordinary shares
Shares in issue (million) 1 462 1 456
Shares in issue net of treasury shares (million) 1 356 1 349
Weighted average number of shares (million) 1 354 1 345
Diluted weighted average number of shares (million) 1 376 1 377
Market price per share (cents) 3 363 3 630
Currency conversion guide (R:£)
Closing exchange rate 17.79 20.94
Average exchange rate for the period 21.04 18.55
ADMINISTRATION
Netcare Limited
("Netcare", "the Company" or "the Group")
Registration number 1996/008242/06
(Incorporated in the Republic of South Africa)
JSE share code NTC ISIN ZAE000011953
Registered office
76 Maude Street (corner West Street), Sandton 2196, Private Bag X34, Benmore 2010
Executive directors
RH Friedland (Chief Executive Officer) KN Gibson (Chief Financial Officer) J Watts
Non-executive directors
JM Kahn (Non-executive Chairman), T Brewer (Deputy Chairperson), M Bower, B Bulo, APH Jammine, MJ Kuscus, KD Moroka, N Weltman
Company Secretary
L Bagwandeen
Sponsor
Deutsche Securities (SA) Proprietary Limited A non-bank member of the Deutsche Bank Group, 3 Exchange Square, 87 Maude Street, Sandton 2196
Transfer secretaries
Trifecta Capital Services Proprietary Limited, Trifecta Capital House, 31 Beacon Road, Florida-North 1709 South Africa
Tel: +27 (0) 860 22 22 13 Postal address: PO Box 61272, Marshalltown 2107 South Africa
Investor relations
ir@netcare.co.za
Disclaimer
Certain statements in this document constitute 'forward-looking statements'. Forward-looking statements may be identified by words such as 'believe',
'anticipate', 'expect', 'plan', 'estimate', 'intend', 'project', 'target', 'predict' and 'hope'. By their nature, forward-looking statements are inherently predictive,
speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future, involve known and
unknown risks, uncertainties and other facts or factors which may cause the actual results, performance or achievements of the Group, or the healthcare
sector to be materially different from any results, performance or achievement expressed or implied by such forward-looking statements. Forward-looking
statements are not guarantees of future performance and are based on assumptions regarding the Group's present and future business strategies and the
environments in which it operates now and in the future. No assurance can be given that forward-looking statements will prove to be correct and undue
reliance should not be placed on such statements.
Any forward-looking information contained in this announcement/presentation has not been reviewed or reported on by the company's external auditors.
Forward-looking statements apply only as of the date on which they are made, and Netcare does not undertake other than in terms of the Listings
Requirements of the JSE Limited, to update or revise any statement, whether as a result of new information, future events or otherwise.
Date: 21/11/2016 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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