Diagnosing Netcare’s outperformance over Life Healthcare

The stocks that get the most attention in a portfolio are usually the high-risk investments with the potential for explosive growth.

Defensive plays, which act as a happy medium somewhere between fixed income and pure equity risk, don’t get much time in the spotlight.

This is a pity, because such stocks can be just as important to long-term risk-adjusted returns as the swashbuckling growth names. The trick is to properly understand the true risk/reward characteristics of these businesses and value them accordingly, as the umbrella term “defensives” can be dangerously misleading.

When there are extensive fixed costs in a business, things can still go wrong even when there are seemingly bulletproof underpins to revenue (like “people will always get sick”). Sure, they might get sick, but will they go to private hospitals? Will they stay the extra night? And what about broader trends like the decrease in the birth rate and the resultant impact on maternity wards?

If occupancy rates come under pressure, or if certain costs related to facilities run away from these groups, then profit growth can be disappointing. But on the flip side, an acceleration in revenue growth can do wonders for margins in these businesses, leading to potentially lucrative share price movements as significant growth isn’t usually priced into these stocks.

The key point is that “defensive” isn’t the same thing as a “stable” performance. This will become clearer when we consider the share price returns and recent numbers released by the hospital groups on the JSE.

Remgro has been doing a great job of keeping us apprised of Mediclinic’s performance since the buyout in 2023, but it’s not possible to invest directly in that hospital group. This leaves us with only two options on the JSE for those who want pure exposure to this sector: Life Healthcare and Netcare.

Unlike in the retail sector, where we can see and touch the different companies and cross-shop the offerings, it can be difficult to understand the differences between the strategies of these two hospital groups.

The consumer decision isn’t based on an affinity for one brand over another. Instead, it tends to come down to medical aid coverage and proximity to home. Relationships with specialists and referrals also play a key role. This already highlights some of the factors that can impact occupancy rates.

Before touching on the differences in strategy, we should look at the obvious similarity: both Life Healthcare and Netcare operate an acute hospitals business (like the emergency units and all the drama you see on Grey’s Anatomy). This may anchor performance, but it doesn’t necessarily provide an appealing return on capital.

To find growth and boost returns, both companies have expanded beyond this offering into specialist facilities focused on areas such as mental health or renal dialysis. This is where things start to get more interesting, as capital allocation into these facilities becomes one of the reasons for divergence in returns. Decisions like building vs buying or investing locally vs offshore become relevant in the expansion strategy. This is no different to any other capital-intensive sector.

In considering Life Healthcare vs Netcare, it’s useful to remember that the former is behaving like a value stock, while the latter’s narrative is more in line with growth stocks. In recent years, Life Healthcare has been disposing of assets and paying special dividends, while Netcare has been investing in operations and bedding down a data-centric strategy.

This makes it trickier to compare the multiyear share price performance, as investors need to first adjust Life Healthcare’s performance based on the special dividends.

In 2024, Life Healthcare declared a special dividend of 600c a share from the disposal of Alliance Medical Group. It subsequently declared a further 70c a share, giving shareholders quite the cash bonanza alongside the ordinary dividend. In 2025, the disposal of Life Molecular Imaging delivered a special distribution of 235c a share. Overall, Life Healthcare has paid roughly R13.2bn in special dividends in the past couple of years. For context, the current group market cap is only R14.8bn!

The frustration for investors is that this strategy hasn’t translated into meaningful growth in the value of the remaining business.

Using January 2024 as our starting point and market prices at the time of writing, Life Healthcare’s share price is down from R18.40 to R10.10. This is a drop of R8.30 per share before we adjust for special dividends of R9.05 a share over that period. The resultant increase in value is a modest R0.75, or just 4% of the starting value in 2024.

Looking over five years to include part of the pandemic period, the total return for Life Healthcare is in the red at -5%. It’s been a huge disappointment for investors.

In considering Life Healthcare vs Netcare, it’s useful to remember that the former is behaving like a value stock, while the latter’s narrative is more in line with growth stocks

Netcare’s return analysis is much simpler, as investors haven’t seen any special dividends to skew the numbers. The share price is up roughly 20% since the start of 2024. If we look at the total return including ordinary dividends, the five-year performance of 37% blows Life Healthcare away. But even this performance is underwhelming compared to many other sectors, giving us a good reminder that the hospital sector isn’t seen as a traditionally lucrative investment opportunity.

Recent financial performance suggests that Netcare’s strong run (relative to Life Healthcare) could continue. For the six months to March 2026, Netcare’s revenue growth of 4.8% was double the 2.4% seen at Life Healthcare.

In a business model that has significant fixed costs and thus operating leverage, this seemingly modest difference in revenue growth can lead to vastly different returns to shareholders. Where Life Healthcare’s interim dividend could only manage 9.5% growth, Netcare’s shareholders celebrated a 22.2% jump in the interim dividend.

Put differently, a revenue growth differential of 2.4 percentage points drove a dividend growth differential of 12.7 percentage points. This is operating leverage in action.

One of the drivers of the revenue differential is the all-important acute hospitals business. Netcare grew revenue in that business by 5.2% vs just 1.1% at Life Healthcare.

A major contributor was the different approach taken to Sizwe Hosmed medical scheme members, with Life Healthcare turning them away based on financial troubles at the fund. Netcare took the riskier approach with its debtors’ book by accepting those members and banking the revenue along the way.

It’s not all bad news at Life Healthcare. The complementary services business grew revenue by 13.7%, whereas Netcare’s comparable primary care division only grew by 8.6% if you exclude the impact of a large occupational health contract. Applying a stricter lens and including that impact reveals a decline in revenue of 10.1%.

Alas, the non-acute businesses are still only minor contributors to the group performance. At Life Healthcare, for example, complementary services contributed just R1.34bn in revenue vs the group number at R12.4bn. Strong growth in that segment cannot offset the disappointing performance in acute hospitals.

Netcare has come out on top in the latest financial period, but what does the related results commentary tell the market about the longer-term prospects?

Life Healthcare’s narrative focuses primarily on margin upliftment opportunities and cost-saving initiatives. It has a cost-saving target for financial 2026 of R100m, with R51m in savings already identified. It feels a lot like self-help initiatives in a company that is struggling to grow.

Netcare is a lot spicier, with many slides in the deck focused on the data and AI space. There’s also a cost-saving angle here, with the CareOn project having delivered cumulative cost savings of R705m since 2022 vs an implementation cost of R670m. The project lifetime internal rate of return is estimated at over 30%.

But the data push goes well beyond that, with Netcare showcasing AI deployments and technology innovations linked to analytics, wearables, prescription models and even a “de-jargoniser” that makes discharge summaries more patient-friendly. The gap between AI stories and actual monetisation remains a major focal point in the market, but at least Netcare is telling the story as a starting point.

In practice, it’s hard to believe that Life Healthcare isn’t thinking about this stuff as well. But if it is, it’s keeping relatively quiet about it.

Netcare’s financial 2026 revenue growth guidance of 4%-4.8% leaves it reliant on operating leverage to drive growth in profits. At Life Healthcare, revenue growth guidance of 2% puts it at serious risk of being on the wrong side of operating leverage if it doesn’t deliver the cost savings.

Does the valuation adequately account for this growth gap? Life Healthcare’s earnings multiple of 9.2 is lower than Netcare’s 11.6. Taking an even simpler approach and looking at a price/sales multiple, Life’s 0.57 is its lowest yet — a clear sign that the market isn’t backing its growth prospects. Over at Netcare, the multiple of 0.73 is slightly below the five-year average of 0.82.

After working through the recent results, investors may conclude that Life Healthcare is a value trap, while Netcare could be a slightly underpriced growth stock. Recent market momentum would support that view.

The bigger debate is around whether these stocks offer appealing enough investment characteristics vs investing in bonds or property. The interest rate cycle makes this analysis tricky, as the recent rate hike is a warning shot for balance sheets that run structural debt balances (Netcare’s net debt to ebitda is 1.2 times vs Life Healthcare’s 0.9 times).

If IM had to pick one, it would be Netcare. If for no other reason, it’s the investment in data that creates interesting further opportunities. If Life Healthcare is following a similar strategy, it needs to get a lot better at talking about it. Otherwise, it is likely to be condemned to the single-digit earnings multiple club.