Let’s be frank: private hospital shares in SA aren’t a 10-bagger opportunity — or even a chance to double your money. But they do offer a healthy and market-beating medium-term return at a fairly low risk. That’s nothing to be sneezed at these days, given the Chinese regulatory rattle at Naspers/Prosus, sudden brittleness in the commodity boom, ominous dips in US markets and political noise ahead of the local government elections.
But the JSE’s three private hospital groups — Mediclinic International, Netcare and Life Healthcare Group — are all recuperating differently from the pandemic. So some stock-picking prescription is probably needed.
Mediclinic, which holds an extensive offshore operational base, is up about 4% over the past 12 months (see box on page 26). Netcare is up a more sprightly 22% over a year, and Life Healthcare’s share price has increased a resounding 32%.
By the FM’s estimate, investors with a penchant for private hospitals prefer Netcare and Life Healthcare over laggard Mediclinic. Their predominantly SA-focused operations offer an uncluttered option to an ageing population where the better-heeled are unlikely to venture into state health facilities.
Netcare exited its difficult UK operations recently, and Life Healthcare withdrew from ventures in India and Poland. Both have a viable presence in mental health care, and Life Healthcare holds a promising diagnostics and imaging business offshore.
Investment managers see plenty of upside as trading conditions edge towards normality.
36One portfolio manager Evan Walker says his company has bought into the private hospitals sector quite aggressively over the past six months. "We think the market’s still not rewarding it for the next couple of years of growth," he says. "There’s a lot of forward earnings momentum in that sector."
ClucasGray fund manager Grant Morris also believes private hospitals are a reasonable place to be invested. "These businesses, over time, have proved to be more resilient and defensive … than one might give them credit for," he says.
Financial reports from Life Healthcare and Netcare show high cash conversion ratios, which is reassuring in terms of debt on the balance sheet. Margins have not been too badly bruised.
Overall, though, investors should view private hospitals strictly as a recovery play.
Walker notes the pent-up demand for elective surgery procedures. Private hospitals initially postponed elective surgeries for fear of a Covid overrun. More recently, fear of Covid infection in hospitals has kept patients at bay. But this will change as more of SA’s population is vaccinated.
"People haven’t gone into hospital [to have] their hip replacements," says Walker. "We think the hospitals are going to have a bit more pricing power. They’ve done a lot to restructure their businesses in tough times, they’ve taken a lot of costs out and they’re a lot leaner than they were … We think they’re going to have some tailwinds now."
Though life will slowly return to normal, Walker believes the consequences of Covid "will live with us for a long time — like cardiovascular illnesses, which will drag on and keep hospital beds full".
At last count, Life Healthcare’s overall weighted occupancy in the interim period to end-March was 57.4%. While this is down on the corresponding pre-Covid period in 2020, when occupancies were 67%, it’s an encouraging increase from 50% in the second half of financial 2020.
Netcare’s average acute hospital occupancy levels also improved during the first half of 2021, with full-week acute occupancy averaging 53.8% compared with 42.8% during the second half of 2020, and week-day occupancies of 57.1% compared with 45.1%.
According to Morris, pre-Covid occupancies in SA operations sat at about 65%-70%. So there is still "some way to go" for recovery.
Mergence Investment Managers portfolio manager Izak van Niekerk says the recovery in private hospital stocks, particularly his preferred picks Netcare and Life Healthcare, is based on operations "normalising" by the end of September 2023 — "factoring in a handicap for the slow vaccine rollout", he says.
Aside from increased vaccinations eventually driving up elective surgeries, Van Niekerk argues that hospitals will also benefit from reduced Covid costs. He points out that initial purchasing of personal protective equipment (PPE) was expensive and staff costs were high, with temp workers brought in to cover for staff who had to isolate. Now, PPE prices are levelling off, and staff are fully vaccinated.
Van Niekerk also believes private hospitals need to be seen as recovery investments. Once share prices reflect normalised trading conditions, the usual concerns about the industry will come back into play. These include uncertainty around National Health Insurance, legacy debt, lack of expansion opportunities and medical advances that might spur cheaper day-surgery procedures.
The key longer-term drawback is that the number of medically insured people — about 9-million — is flat. With unemployment growing, it seems likely that this figure will diminish rather than grow over the next five years. This offsets the argument that private hospitals are well placed to serve SA’s ageing population.
Still, Morris sees the bright side. "Growth will be steady rather than spectacular," he says. "But private hospital shares can fulfil a role by giving a portfolio low-risk exposure to assets in recovery mode."
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