JOHANNESBURG – One way of getting good returns on the JSE is to buy shares of solid but battered companies with the potential to recover their profitability. In February the share price of Mediclinic dropped below R55 to levels of seven years ago, and ever since hovers around just above this level. Almost impossible to believe it traded above R200 in 2016.
Mediclinic has had its fair share of bad luck, with regulatory changes in foreign jurisdictions. Not to speak of local developments, with National Health Insurance threatening the future of private hospitals in South Africa.
Whether this will materialise is another question, since the three JSE-listed hospitals – Netcare, Mediclinic and Life Healthcare – contribute an estimated R55 billion per annum to the gross domestic product.
Last month The Hospital Association of South Africa, which represents the private hospital sector, presented its views on the risks to the economy to Business Unity South Africa, with the potential loss of at least 100 000 jobs if implemented.
Mediclinic has diversified its business very well over the last few years, and Southern Africa now only contributes 30 percent of total revenue, with Switzerland and the Middle East contributing 47 percent and 22 percent respectively. Mediclinic Southern Africa operates 48 hospitals and four day clinics throughout South Africa and three hospitals in Namibia with more than 8 100 inpatient beds in total.
Mediclinic Middle East operates seven hospitals and 22 clinics with more than 900 inpatient beds in the United Arab Emirates (UAE). They are the leading private healthcare provider in this area, and the long-term market fundamentals are attractive. In 2017 they started the rebranding of Al Noor facilities and the last set of Mediclinic results included this cost.
Recent guidance is that this division expects to deliver full-year revenue growth in the high single-digit percentage range, reflecting the underlying operating performance of the business and additional bed capacity coming online in the second half of the year. They expect a slightly improved earnings before interest, tax, depreciation and amortisation margin (13 percent) this year, with ongoing margin expansion to around 20 percent by 2023.
The half-year results published in November 2018 showed a lower contribution from the Swiss division, due to regulatory changes in the Swiss healthcare market. This caught management off-guard; these changes came into play faster than they could react.
It led to Mediclinic changing the division chief executive very quickly; after all, they have experience from regulatory issues in foreign jurisdictions. They might be able to get through this one with fewer blemishes than the UAE. Hirslanden in Switzerland operates 18 private hospitals and four clinics, with more than 1 900 inpatient beds.
The market might be pricing Mediclinic too negatively. The case for recovery is good: Switzerland-suffering seem to be temporary, and the Middle East is now delivering care of superior international standards in patient experience and clinical excellence.
Expansion opportunities are there, and long-term growth seems to be sustainable. Another snippet of good news came last week from 44 percent shareholder Remgro. At their results presentation they made it clear that none of their businesses are impacted by load shedding.
Mediclinic has a primary listing in London, with secondary listings on the JSE and the NSX in Namibia.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Mediclinic shares are held on behalf of her clients.