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Pre-Close Trading Update
NETCARE LIMITED
(Registration number 1996/008242/06)
JSE ordinary share code: NTC
ISIN: ZAE000011953
JSE preference share code: NTCP
ISIN: ZAE000081121
("Netcare")
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 October 2016 to date
(period under review), unless otherwise specifically stated.
SA: Hospitals and Emergency Services
The division has experienced a very challenging period of trading for the period under
review. The trading environment has been characterised by low growth in the SA economy
and in total medical scheme beneficiaries. Hospital revenue per patient day has increased by
7.7% over the five months to the end of February 2017. The higher increase in revenue per
patient day compared to recent years is due to a greater proportion of higher complexity
cases, which impacts on levels of care, and an associated increase in drugs and surgicals
revenue per patient day. Furthermore, there has been a stabilisation in our surgical to
medical mix. Following a period of significant utilisation growth experienced across the
private hospital sector in 2016, funders have implemented more stringent hospital
admission authorisation policies and tightened their case management processes. There has
also been a decline in the number of maternity cases across our maternity units. Influenced
by these factors, patient days for H1 2017 up to 29 March 2017 reflect a decline of c. 1.0%
against H1 2016. In line with activity, full week occupancy levels are tracking at c. 63.3% in
H1 2017 to date versus 64.4% in the comparative period.
The results for the period under review have also been adversely impacted within our
Emergency Services division by the significant reduction in revenues from industrial sites in
Mozambique as prevailing economic difficulties are curtailing activity within the mining and
resources sectors. The Emergency Services business had, over a number of years, built up a
successful client base of industrial sites in Mozambique, which subsidised the performance
of the local Netcare 911 operations. However, this benefit has fallen off sharply in the
current reporting period with an expected swing of c. R24 million at EBITDA level between
H1 2016 and H1 2017. The position has been exacerbated by the detection in H1 2017 of a
non-cash accounting error relating to the prior year. The error arose through an
overstatement of revenue related to accruals for work-in-progress cases. The non-cash
accounting error was spread across the full 2016 financial year and amounted to
R81 million. We have taken the approach of correcting the error against the corresponding
periods in which it arose. Accordingly, the H1 2017 results will include a correction of
R40 million, with the balance to be corrected within H2 2017.
With regard to the earnings before interest, taxation, depreciation and amortisation
(EBITDA) margins, we expect these to reduce in H1 2017 by between c. 120 to c. 150 basis
points for the period under review against the EBITDA margins reported for H1 2016,
influenced by the following factors:
* Lower than anticipated patient day activity placed pressure on the management of
direct payroll, further exacerbated by the increased complexity of admissions and
resultant high demand for ICU, which requires higher skilled staffing levels thereby
increasing the average cost of nursing. This increased complexity also resulted in
higher consumption of more expensive drugs and surgicals, on which no margin is
earned;
* Rental charges on the new Netcare Christiaan Barnard Memorial Hospital of
c. R16 million in H1 2017, with an expected impact on EBITDA margin of c. 20 basis
points; and
* The impact from Emergency Services, which accounts for c. 80 basis points of the
expected EBITDA margin decline, of which c. 50 basis points is attributable to the
prior period error and c. 30 basis points to the decline in Mozambique.
In our previous guidance we indicated that we expected EBITDA margins to decline due to
the potential impact of sizeable new “efficiency options” being introduced by medical
schemes. The take-up on these “efficiency options” has been lower than anticipated to date
and the impact on margins in H1 2017 is expected to be minimal.
The Netcare Christiaan Barnard Memorial Hospital is trading well in its new premises on the
Cape Town foreshore. For the period under review, patient days at this site have grown by
c. 5.9%. We have concluded the sale of the old Netcare Christiaan Barnard Memorial
Hospital premises for a consideration of R300 million. The cash proceeds are, however, only
expected to be received in H2 2017. The business has been successful in retaining key
doctors and has grown its base of specialists by a net 47 doctors by end February 2017. With
effect from 1 December 2016, Netcare acquired the 94-bed Lakeview Hospital in Benoni for
a consideration of R140 million, and 35 under-utilised beds have been converted to
disciplines where there is higher demand. The acquisition of Akeso Clinics, comprising 12
mental health facilities, and announced in November 2016, has been submitted to the
Competition Commission for approval.
Primary Care
The division has continued executing on its strategy of focusing on provider services. As of
31 December 2016, the division has wound down its managed care administration services
offering. The outsourcing of retail pharmacies to Clicks at the division’s Medicross medical
and dental centres took effect on 1 December 2016. This has had a structural impact on the
division’s revenue, with pharmacy revenues being replaced by rental income. While this
does not have a notable impact on EBITDA, it is expected to improve the H1 2017 EBITDA
margin to low double digits.
The division has continued expanding its offering in the day clinic and sub-acute market.
A new day clinic in Kimberley, comprising 20 beds, two theatres and an endoscopy unit,
commenced operations in mid-October 2016. Development is on track for the opening of a
further sub-acute and rehabilitation facility in Hillcrest, comprising 30 beds, and a day clinic
in Upington, comprising 12 beds and two theatres, both scheduled to open in H2 2017. In
addition, the development of a further two new day clinics and two new sub-acute facilities
is underway for opening in FY2018.
United Kingdom
With regard to the performance of BMI Healthcare, inpatient and day caseload for the
period to date has grown by c. 2.0% year-on-year, noting that March 2016 included the
Easter holidays. We continue to see growth in both Self-pay and NHS caseload and a
reduction in PMI funded work. NHS caseload in H1 2017 to date has grown by c. 8.0%. This
growth is driven by NHS e-referrals, which have increased by c. 10.5% to date, while NHS
spot work contracted by c. 2.0% in the same period reflecting financial constraints at many
NHS Trusts in the second half of the 2016/17 NHS financial year. PMI caseload in H1 2017 to
date has reduced by c. 4.0%. Self-pay activity has continued to grow increasing by c. 5.5%
during H1 2017 to date. Within the Manchester area a competitor has relocated to a new
facility. We can confirm that to date the impact on the operations of BMI The Alexandra
Hospital has been minimal with regard to loss of doctors and activity levels. At an
operational level, profits and pre-rent margins have broadly held at prior period levels, with
cost control offsetting the reducing effect of payor mix changes. Rental costs are higher in
the current period due to normal lease escalations and the impact in the prior period of a
one-off lower rental charge at a single hospital. These higher rental charges, combined with
a further non-operational benefit in the prior period relating to the reversal of a provision in
respect of the resolution of a dispute with a service provider, have resulted in a lower
EBITDA and EBITDA margin than reported in H1 2016. The EBITDA margin for H1 2017 is
expected to be between c. 130 and c. 180 basis points lower than the prior period EBITDA
margin of 6.8%.
Corporate transactions
In light of pending debt maturities, BMI Healthcare has progressed the refinancing of its
existing debt facilities, and is pleased to announce that it has agreed terms and
commitments with a club of lending banks with respect to a new financing package, subject
to completion of full documentation and standard conditions precedent, and expects to
complete this refinancing in April 2017. The new debt package comprises of a 5-year Term
Loan B facility of £85 million and a Revolving Credit Facility of £50 million, with the debt
beneficially held by Netcare being extended further to April 2023. The refinancing does not
in any way preclude the conclusion of a rent reduction arrangement with PropCo.
It was announced at the time of the release of our 2016 results in November 2016 that BMI
Healthcare had agreed heads of terms with its major external landlord with respect to a rent
reduction coupled to changes in BMI Healthcare’s lease agreements with PropCo.
Accordingly, in anticipation of its imminent conclusion, broad parameters of the proposed
deal were shared with the market. Final agreement was, however, not reached as
anticipated and BMI Healthcare and PropCo remain in discussions on how best to bring the
rent reduction transaction to a conclusion. While the rent reduction remains of interest to
BMI Healthcare, the business and its shareholders are only supportive of a transaction that
is mutually beneficial and enhances BMI Healthcare’s long-term position.
Group results
The average Rand exchange rate against the Pound Sterling has been considerably stronger
in the period under review. The average Rand/Pound Sterling exchange rate applicable for
H1 2016 was R22.10. In the 5 months to February 2017, the average Rand/Pound Sterling
exchange rate was 23.1% stronger at R16.99. The stronger Rand will negatively impact the
conversion of the UK results in the consolidated Group accounts.
The UK RPI swap instruments, which were anticipated to be eliminated on completion of the
rent deal, remain in place as part of the existing PropCo lease arrangements and will be
adjusted to their fair value at 31 March 2017. Since September 2016, movements in market
expectations of future inflation indices have significantly reduced the mark-to-market value
of the RPI swap instruments. We advised in our September 2016 annual financial
statements that the mark-to-market valuation of the RPI swap instruments decreased from
R2 129 million or £119.7 million at 30 September 2016 to R1 188 million or £72.1 million at
31 October 2016.
The closing mark-to-market valuation of the RPI swap instruments will only be capable of
determination after the half-year. However, on the assumption that there are no marked
changes in underlying market conditions, the RPI swap instruments may give rise to a
material, non-cash fair value accounting credit that will be recognised in the H1 2017
results. Any such accounting credit would be unrealised, non-cash and would not have an
impact on the adjusted headline earnings per share (HEPS) of the business.
In light of the trading factors covered above and the expected impact of currency
conversion on the H1 2017 results, adjusted HEPS for H1 2017 is expected to be between
c. 9.0% and c. 13.0% lower than the adjusted HEPS of 91.0 cents per share reported in H1
2016.
The above information has not been reviewed or reported on by Netcare’s external
auditors.
Johannesburg
30 March 2017
Sponsor
Deutsche Securities (SA) Proprietary Limited
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