Author: Patrick Cairns|
09 December 2011 00:44
Article from the Money Web
A recession proof industry?
Orapa – The private hospital industry has become an integral part of South Africa's healthcare environment. With a growing middle class and a struggling public sector, private healthcare is increasingly in demand.
As the largest private hospital group listed on the JSE, Mediclinic offers investors a means to tap into that trend. It has also successfully expanded internationally to diversify its revenue streams. In the last financial year, 55% of the group's earnings came from its overseas businesses.
Mediclinic operates 49 private hospitals in South Africa and three in Namibia. Internationally, the group owns 100% of Hirslanden, which operates 14 acute care facilities in Switzerland. It also holds a 50.4% stake in Emirates Healthcare, which operates two hospitals and eight clinics in the UAE.
History
In 1983 the Rembrandt Group (now Remgro) commissioned a feasibility study on private hospitals in South Africa. The result was the purchase of four facilities in Cape Town and Johannesburg and the listing of Mediclinic (originally called Medi-Clinic) on the JSE in 1986.
Over the next 20 years, through a series of acquisitions and building new centres, Mediclinic grew to own nearly 50 hospitals across the country. It also established and took a 100% stake in emergency services company ER24.
In 2007, the group took a controlling interest in Emirates Healthcare in Dubai. The same year, it acquired the Hirslanden private hospital group in Switzerland.
Mediclinic rebranded itself to become Mediclinic International in 2011.
Remgro maintains a 45.2% stake in Mediclinic.
Dividends
Mediclinic offered steady dividend growth between 2007 and last year. From a total dividend (interim plus final dividend) of 54.1 cents per share in 2007, the group paid out 61.2 cents per share in 2008, 68.6 cents per share in 2009, and 73 cents per share in 2010. The payout for 2011 however remained constant at 73 cents per share as the group looked to increase its dividend cover.
The interim dividend declared for the six months to 30 September 2011 was unchanged from the previous two years at 23 cents per share. The counter currently offers a dividend yield of 2.2%.
Which funds hold this stock?
Mediclinic is not widely held by South Africa's leading unit trust funds. Only one of the top perfoming equity industrial funds over the last three to five years holds any Mediclinic Stock. The Coronation Industrial Fund holds 1.6% of its funds in the counter.
Similarly, only two of the top five general equity funds have exposure to Mediclinic. The Kagiso Equity Alpha Fund gives the counter a weighting of 1.5% in its portfolio, while the Prudential Equity Fund recently bought into Mediclinic and holds 0.4% of its funds in the stock.
To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool.
Why would an individual consider investing in this company?
No matter the economic cycle, healthcare remains in demand. This makes companies in the private hospital sector – an industry that RMB Asset Management's Wayne McCurrie refers to as “recession- and crisis-proof” - highly defensive in nature.
Mediclinic's defensive qualities are clearly illustrated by the fact that the group's operating profit and cash generated from operating activities have both grown at compound annual growth rates of around 30% over the last seven years. These figures have also climbed consistently year-on-year, despite economic downturns.
In addition, the group's profits are geographically diversified enough to offer investors significant offshore exposure. Although its international businesses do not offer returns as good as those from South Africa, they do enjoy market leading positions in their respective countries.
“Mediclinic operates on three main geographical platforms,” notes Frost & Sullivan healthcare analyst Tinotenda Sachikonye. “This not only enables significant diversification, but places it in a position to benefit from unique opportunities in these widely-varying markets.”
In addition, the group boasts a highly experienced management team that has led Mediclinic's growth over the last two decades. It has also enjoyed the benefits of having Remgro as a major long-term shareholder.
What risks does this company face?
Regulatory issues across its operating regions would appear to be Mediclinic's greatest concern. In Switzerland, a new health insurance system due to come into effect from next year could place pressure on margins as the government seeks to control costs.
In South Africa, the healthcare arena continues to be beset by a degree of uncertainty. Although the relationship between government and the private sector has improved in recent years, the government continues to make suggestions that it believes private healthcare is too expensive and it may seek ways to regulate this.
As with all private healthcare companies in South Africa, Mediclinic will also be scrutinising developments around the planned National Health Insurance (NHI). Although there are still a number of unanswered questions around the scheme, the group has stated that it supports the NHI in principle and believes that it will offer opportunities for the private sector.
“Under the framework of the NHI, it seems clear that government will outsource services to accredited providers,” Sachikonye explains. “Mediclinic is therefore likely to see increased numbers of patients through its doors. This will provide an opportunity for growth, although the effect will not be immediate.”
Medical services providers in South Africa are also constantly under pressure to source the necessary skills to staff their operations. Mediclinic has had to recruit specialised nurses from India to work in operating theatres and intensive care units at a number of its hospitals. It also trains around 1 000 nurses each year.
Where does this company’s growth potential lie?
With the number of South Africans covered by medical aid growing, Mediclinic still sees some potential for growth in the local market. The group is engaged in a number of projects in to add capacity to its existing hospitals.
It has also indicated that it would be interested in pursuing public-private partnerships (PPPs) in South Africa, but only if the government becomes willing to outsource clinical services. As Mediclinic South African chief executive Koert Pretorius told Moneyweb earlier this year:
“We’ve looked at many projects over the years and we’ve discussed all these proposals regarding training, management, support, etcetera with government. But the basic problem currently with PPP’s in South Africa is that to date, government has not been willing or able to outsource the core clinical services. We believe the major opportunities will only arise once government is prepared to outsource the clinical service because that is our core business.”
Frost & Sullivan's Sachikonye also believes that the group has opportunities for growth offshore in the medium to long term. She suggests that the UAE business has potential for expansion, while Hirslanden may offer a base from which Mediclinic could push further into Europe.
“In the UAE, the demand for hospital services already outstrips supply,” she notes. “The UAE offers one of the most stable political environments in the Middle East, and as multinational companies seek opportunities in this emerging region it’s a reasonable expectation that the influx of foreign professionals into the country will spur the demand for private healthcare services.”
In Switzerland, the impending healthcare reforms may also place pressure on smaller players in the private hospital industry, not least of all due to the introduction of fixed fees. As the only large private hospital group in the country, Hirslanden could find itself in a position to benefit as industry consolidation becomes imperative. Mediclinic may also leverage its presence in Switzerland to enter other European markets at the economy in that region recovers.
Article from the Money Web
