Wrap Text
Investor update
NETCARE LIMITED
(Registration number 1996/008242/06)
JSE ordinary share code: NTC
ISIN: ZAE000011953
JSE preference share code: NTCP
ISIN: ZAE000081121
("Netcare")
INVESTOR UPDATE
- Trading for the six months ending 31 March 2020 broadly in line with previous guidance,
excluding COVID-19 impact.
- R150 million spent to enhance Netcare’s COVID-19 preparedness.
- Netcare has committed to Government to treat public patients suffering from COVID-19 in
Netcare facilities on a not-for-profit, cost recovery basis. Given our limited capacity, any
referrals from the public sector will need to be assessed and pre-authorised by Netcare on a
case-by-case basis.
- South Africa now, more than ever, depends on all healthcare workers, nurses and doctors and
Netcare will take the necessary measures to ensure that they remain protected throughout
the pandemic.
The purpose of this announcement is to provide an update on Netcare’s trading for the six months
ending 31 March 2020 (“H1 2020”). Furthermore, amid an extremely fluid and rapidly changing
landscape, Netcare is also providing an update on the Coronavirus (or COVID-19) pandemic and, in
particular, Netcare’s state of preparedness.
HOSPITALS AND EMERGENCY SERVICES
The COVID-19 pandemic notwithstanding, the South African healthcare sector remains constrained,
given the country’s underlying macro-economic landscape. Competition in the healthcare market
remains resilient and there is continued growth in the number of beneficiaries covered by low cost
restricted hospital network options.
In November 2019, Netcare correctly guided that H1 2020 acute activity would be negatively impacted
by 2019 hospital network arrangements, particularly in the last three months of the 2019 calendar
year. In addition, we experienced ongoing pressure in respiratory admissions prior to the COVID-19
pandemic and a tightening of conditions on an existing Designated Service Provider (“DSP”) network
for the 2020 calendar year. While acute patient days to date are lower compared to the same time
last year, we experienced some recovery in activity in the new calendar year. This growth has been
offset by concerns related to the onset of COVID-19, resulting in slightly softer volumes in surgical
procedures in the month of March 2020.
Given the above, we expect total patient days to decline by 2.7% for H1 2020. This comprises growth
of 1.8% in mental health, as demand for Akeso Clinic’s services remains strong and a decline of
approximately 3.1% in acute hospital patient days (excluding the Netcare Rand, Bell Street, Port Alfred
and Settlers hospitals). The decline in acute patient days in H1 2020 is primarily attributed to the
competition created by new hospital networks implemented effective January 2019 and the impact
of COVID-19 from mid-March 2020.
For the five months ended 29 February 2020 (excluding Netcare Rand, Bell Street, Port Alfred and
Settlers hospitals), full week occupancy levels within acute hospitals were at 62.5%, compared to
64.0% in the 2019 comparative period. Acute hospital revenue per patient day increased by 5.1%
during this period.
In line with Netcare’s focus on improving asset utilisation, 19 under-utilised acute hospital beds were
converted to high demand disciplines in September 2019 with a further 42 beds being converted in
H1 2020. Of the 100 beds transferred from Netcare Rand Hospital to Netcare Milpark Hospital, 48
beds were opened in mid-September 2019 and the remaining 52 beds were commissioned in January
2020. Netcare continues to attract specialists and a net 42 doctors were granted admission rights at
acute and mental health facilities during the five months to February 2020.
Despite the lower than anticipated volumes, EBITDA margins within the core acute hospital business
- measured before the impact of IFRS 16 - are broadly in line with guidance and FY 2019 levels of
20.5%. This has been primarily as a result of the successful introduction of ongoing cost containment
and efficiencies. However, the impact on EBITDA margins in the month of March 2020 remains
uncertain, following the extraordinarily significant focus on COVID-19 preparedness, and the
commencement of a national lockdown from 27 March 2020.
The implementation of the CareOn pilot at Netcare Milpark Hospital remained on track and is within
budget. This involves implementing fully mobile digitised patient and clinical records in terms of
Netcare’s strategy to deliver person-centred health and care that is digitally enabled and data driven.
The digitisation roll-out of all other Netcare divisions also remained on schedule.
PRIMARY CARE
All 15 Medicross day theatres were successfully integrated into the Hospital Division with effect from
1 October 2019. The business also rationalised some previously loss-making Medicross clinics.
Consequently, total revenues in the Primary Care division are expected to decline against the prior
period. However, underlying revenue (excluding day theatres and rationalised clinics) is expected to
increase by approximately 7.5%. Notwithstanding the lower total revenues, EBITDA is expected to
remain relatively flat against the prior period, and EBITDA margins – measured on a pre-IFRS 16 basis
- are expected to remain in line with H1 2019.
GROUP
As previously disclosed, Netcare’s B-BBEE ownership transaction has resulted in the recognition of a
once-off, non-cash IFRS 2 charge of R348 million. This accounting charge will be excluded from
adjusted HEPS.
Netcare adopted the new IFRS 16 statement on leases from 1 October 2019. Detailed guidance was
provided in the Company’s annual financial statements, which were released on SENS on 18
November 2019. These statements indicated a reduction in EPS and HEPS of between 14.9 and 18.6
cents per share on an annualised basis. There is no change to this guidance.
As previously reported, the sale of six United Kingdom (“UK”) hospital properties owned by GHG
PropCo 2 was successfully concluded in late January 2020. This completes Netcare’s exit from the UK
and the final wind up of the UK structure is in progress, which will enable a repatriation of the net
proceeds after the settlement of debt and related expenses. We expect to realise cash proceeds of
approximately R500 million in H2 2020, well in excess of the carrying value of Netcare’s 56.9% interest
in GHG PropCo 2 of R226 million, reported at 30 September 2019.
Netcare executed the buyback and cancellation of 12.7 million shares at an average price of R19.60 a
share for approximately R250 million during November and December 2019.
COVID-19 PANDEMIC
These are unprecedented times. The COVID-19 pandemic has infected over circa 723,000 people
globally resulting in more than 34,000 deaths. More than two billion people around the world are in
some form of lockdown or self-isolation. In South Africa, the situation remains extremely concerning
given the levels of population density in certain geographical areas, a factor which is further
exacerbated by the significant proportion of the population who are immune compromised. As we
enter the winter season in which approximately 19% of South Africans contract Influenza or the Flu
virus, the situation may worsen. Based on Netcare’s actuarial forecast models, the already constrained
health system will struggle to cope with the looming, and significantly higher increase in the number
of patients requiring hospitalisation and ICU care.
Netcare is fully supportive of the 21-day nationwide lockdown in order to ‘flatten the curve’ and lower
the communal spread of COVID-19. However, our modelling suggests that, as has been experienced
in other countries and depending on the effectiveness of the lockdown, it will require on-going
evaluation to determine if the time period is sufficient to achieve its intended goals.
To fully prepare for COVID-19, Netcare is engaged on a regular, ongoing basis with healthcare
colleagues across the globe, particularly in China, Italy and France in order to ensure the valuable but
painful lessons learned elsewhere are fully implemented in South Africa. Netcare has adopted an
‘abundance of caution’ approach to ensure that our healthcare workers and doctors remain protected
throughout the pandemic. As a result, Netcare has introduced appropriate measures, including
relevant training of employees, as well as screening and isolating patients to contain the spread of
COVID-19 across our entire network of facilities. Netcare has spent R150 million to enhance the
readiness of its ICU/High Care facilities, including purchasing additional ventilators, ultraviolet light
disinfection robots and specialised air filters to ensure appropriate disinfection measures.
With the exception of the CareOn digital rollout at Netcare Milpark Hospital, all other strategic
projects have been suspended. Given the lockdown, all routine activities other than essential activities
relating to COVID-19, have been stopped. Netcare has also suspended non-essential elective surgery,
to ensure that asymptomatic COVID-19 positive patients are not operated on, thereby potentially
placing other patients, healthcare workers and doctors at risk of acquiring the virus.
To preserve cash and ensure liquidity, R800 million of capex earmarked for new and current projects
has been postponed, as have further share buy-backs. Management continues to actively monitor
working capital and has prioritised additional inventory reserves, including adequate levels of personal
protective equipment, drugs and consumables.
The Netcare Group’s statement of financial position and cash flows remain in a healthy condition. Net
debt to EBITDA at 31 March 2020 will remain well within Netcare’s capital management target of
maintaining this metric at less than 2.0 times EBITDA and comfortably within banking covenant
requirements of less than 2.75 times. Given the various measures taken, adequate levels of covenant
headroom are expected to be maintained throughout H2 2020. The business currently has cash
balances and committed banking facilities in excess of R3.5 billion from which to manage its future
liquidity requirements. Netcare has also proactively pre-funded debt facilities maturing in June and
July 2020 with new three-year facilities.
Netcare is committed to working with Government and all other stakeholders to assist in containing
and treating the pandemic. We have proposed to the national and provincial Departments of Health
that Netcare will treat public patients in Netcare facilities. Given the exceptional circumstances and to
ensure sustainability, Netcare will provide these services to COVID-19 related patients on a not-for-
profit basis, seeking only to recover costs. Given our limited capacity, any referrals from the public
sector will need to be assessed and pre-authorised by Netcare on a case-by-case basis.
GUIDANCE
The impact of COVID-19 introduces significant forecast risk. Moreover, due to the increasing
communal spread of the virus, Netcare has escalated its state of preparedness. Given the high level of
uncertainty surrounding the impact and possible knock-on effects of COVID-19, coupled with a
suspension of non-essential elective surgery as a result of the 21-day national lockdown, Netcare has
decided to withdraw the FY 2020 full year guidance.
Netcare will be better positioned to provide updated guidance at the time of publishing its interim
results in May 2020. This may also necessitate a revision of Netcare’s dividend policy.
At this critical time in South Africa’s history, Netcare stands ready to serve the nation by striving to
provide outstanding care to its citizens, whilst always ensuring the safety of our healthcare workers,
nurses and doctors.
The information provided in this update on H1 2020 trading has not been reviewed or reported on by
Netcare’s external auditors.
30 March 2020
Sponsor
Nedbank Corporate and Investment Banking
Date: 30-03-2020 03:00:00
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