OPINION: Netcare shares gain after full-year results published
Netcare operates the largest private hospital, primary healthcare, emergency medical services and renal care networks in South Africa. In addition to its world-class hospital services, Netcare offers primary healthcare, sub-acute care, day surgery, occupational health and employee wellness services through Medicross, emergency medical services through Netcare 911 and renal dialysis through National Renal Care and mental health and psychiatric services through Akeso.
Netcare also has the distinction of being a leading private trainer of emergency medical and nursing personnel in the country.
Netcare delivered a resilient financial performance in a challenging market. The broader South African economy continues to struggle, and the healthcare environment faces several growth challenges. Medical scheme membership is stagnant, and funders remain focused on initiatives to reduce healthcare costs, including the introduction of more affordable medical scheme options which limit member access to specific providers across the healthcare value chain.
Against this backdrop, Netcare has managed its cost base well with targeted efficiency initiatives gaining traction, specifically in the second half of the year.
In its full-year results the numbers were not high, but exceeded market expectations. The business has managed its cost base as cost-efficient initiatives began to take shape, and Akeso mental health and psychiatric services clinics showed strong growth. Revenue increased by 4percent to R21.6billion, Gross profit rose by 6percent, and the gross margin rose by 70 basis points to 50.7percent. Earnings before interest, taxes, depreciation, amortisation increased by 4.3percent to R4.3bn while adjusted operating profit grew by 4percent.
Hospital and emergency services revenue rose by 4.1percent; this was driven by an increase in patient days of 3.7percent. Acute patient days declined by 1.4percent, which was offset by strong growth from Akeso clinics. Acute hospital revenue per patient day grew by 4.3percent. The primary care division achieved strong revenue growth of 10.9percent.
The full-year dividend per share increased by 7percent to 111cents per share, while the group saw a 13.5percent rise in cash generation. Share buybacks are the preferred method of returning excess capital to shareholders, and further share buybacks are anticipated.
Longer-term profit drivers of an increasing disease burden and ageing population remain intact. Still, weak growth in medical scheme membership is likely to remain a feature in the medium term. At a price/earnings ratio of 12 times, all the bad news is somewhat reflected in the current share price.
Netcare has secured participation as an anchor provider in new restricted hospital networks commencing January 2020, which could provide a catalyst for revenue and earnings growth in the future. The dividend is probably sustainable at current levels.
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. Netcare shares are held on behalf of clients.