Private hospital groups seem to be in vogue. The unsolicited bid by Remgro and, bizarrely, logistics behemoth Mediterranean Shipping Co to take Mediclinic private on May 26 attests to this. Remgro already owns a 44.6% stake in the London-based Mediclinic.
Looking at Mediclinic’s two smaller competitors, Netcare and Life Healthcare, divergent returns have been the story here. Netcare lost investors 3.17% over the past 12 months, whereas Life Healthcare’s performance was far worse at a loss of 27.4% (these losses include dividend payouts).
In terms of valuations, Netcare is clearly the more expensive investment at a historic earnings multiple of 22.4 and a forward multiple of 16.5. Life Healthcare, on the other hand, trades at a multiple of 16.8 and a forward multiple of 13.1, meaning analysts expect a profit upswing of about 22% over the next year. The upside for Netcare is about 26% in profit growth.
Both Netcare and Life Healthcare have a chequered history in venturing overseas, unlike Mediclinic (which has made its presence felt in Switzerland and the United Arab Emirates). Netcare burnt its fingers a decade ago in the UK, while Life Healthcare sold off its Polish Scanmed unit last year.
What makes Netcare stand out is the company’s embrace of digital technology to increase efficiency in patient care. Netcare has invested heavily in its CareOn digitalisation project, both in rands and through board oversight. The company aims to roll out this project to a further 20 hospitals by end-September, after implementing it at a single hospital last year. Integrating this software with its emergency and primary care (Medicross) units will improve efficiencies and lead to better patient care outcomes. Duplicity and paperwork are the enemies of any efficient system. (Government, take note.)
Looking at each company’s remaining businesses, Netcare also stands out with its sharper focus on SA. The company continues to invest in new hospitals, opening the 427-bed Netcare Alberton hospital in April and the 36-bed Netcare Akeso mental health hospital in Richards Bay. Patient throughflow at the Alberton facility was satisfactory, according to Netcare’s interim results report.
Life Healthcare, on the other hand, has opted to invest in its European imaging division and to enter the same market locally. Imaging has contributed 30% to Life’s revenue and 32% to its earnings before interest, tax, depreciation and amortisation (ebitda) for the six months to end-March. It had 150 MRI scanners, 55 PET-CT scanners and 11 radiopharmacy cyclotron sites in Europe and the UK at end-March.
Locally, Life Healthcare bought an imaging business that operates in five of its hospitals for R203m in February. It also announced a joint venture with Midrand-based Axim, a supplier of diagnostic imaging equipment, to build SA’s first dual cyclotron facility in Gauteng. It should be up and running by 2024. According to the International Atomic Energy Agency, cyclotrons are used to create medical radioactive isotopes on site.
Thus, there is a clear divergence in strategy between Netcare and Life Healthcare.
Netcare is positioning itself in the acute hospitalisation and primary care space through a digital offering to patients.
With interest rates around the world on the up, Netcare’s prudence in decreasing debt may stand shareholders in good stead
Life Healthcare is expanding in the diagnostic imaging field, with increased investments in this space abroad and locally. It is now also, through its offshore businesses, to be regarded as a rand hedge, with almost a third of revenue derived from abroad.
What does bode ill for Life Healthcare is its venture into pharmacological product development. As Aspen has shown in years gone by, developing drugs is a capital-hungry venture. Why would a company offering physical health-care treatment through hospital beds and imaging want to dabble in drugs? And to top it off, clinical trials for one of the Alzheimer’s drugs, Aduhelm, aren’t going well. US medical authorities had to reimburse participants who paid to partake in the trial.
Looking at each company’s debt, Netcare brought its total debt down to R6.76bn at end-March from R8.47bn a year prior. Life Healthcare cut its debt to R12.07bn at end-March from R13.05bn a year earlier, mainly thanks to the rand strengthening against the pound. Life Healthcare has R3.95bn of debt maturing next year, and the company told analysts at its interim results presentation that it will seek to refinance a part of this through an issue of rand-denominated bonds.
This leaves Netcare with a net debt to ebitda ratio of 1.7 at end-March, an improvement from two a year earlier. Life Healthcare, on the other hand, saw some slippage with its net debt to normalised ebitda ratio worsening to 2.03 at end-March, from 1.82 a year earlier. With interest rates around the world on the up, Netcare’s prudence in decreasing debt may stand shareholders in good stead.
IM’s prescription at this delicate juncture would be a long position on Netcare and a short on Life Healthcare.
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