A great deal has been written about government’s proposed National Healthcare Insurance (NHI) plan. It seemed, for a while, that government would charge in and ram a hastily conceived solution on South Africa’s healthcare stakeholders. But the dust has settled, and as weeks turn to months it’s now clear the feared rush implementation is on the backburner. Government seems to have accepted the single (but multi-faceted) stumbling block to NHI. We simply don’t have enough resources to implement a grandiose ‘equal access for all’ healthcare solution. We don’t have enough hospital beds, medical specialists, general practitioners or nurses to implement the plan. And the taxpayer cannot provide enough cash to pay hospital maintenance, salaries and medical costs.
Life Healthcare’s decision to list its shares on the Johannesburg Securities Exchange suggests they expect the healthcare environment to remain ‘as is’ for now. The private hospital group will become the third major hospital network to seek a listing on the local bourse, joining Netcare and Medi-Clinic. But on closer inspection the group’s pre-listing documents suggest plenty of cause for concern. For one, it’s clear the group is listing to facilitate the exit of two major empowerment stakeholders, Mvelaphanda and Brimstone.
How much is a hospital group worth?
Life Healthcare wants to raise R14.5bn to R17bn from its listing, of which R6.26bn to R8bn will be used to ‘buy out’ the aforementioned shareholders. This would rank it alongside its two local peers. Netcare is worth R19.437bn and generated R11.832bn in revenues in 2009. The company has its feet firmly planted in two markets, South Africa (51% of revenue) and the UK (49%), although the contribution to operating profit is fast skewing towards its offshore businesses. In South Africa Netcare boasts 54 private hospitals, 5 766 registered beds and 239 emergency vehicles. Primary care is provided at 83 Medicross Health Centres, 41 Pharmacross Retail Pharmacies and 24 Prime Cure Clinics. Its UK-based private hospital services division includes 57 acute care private hospitals, 2878 registered beds and two surgical centres aligned with the UK National Health System.
Medi-Clinic’s latest market capitalisation stands at R15.863bn. The company has diversified its South African-based operations through strategic purchases in Switzerland and the United Arab Emirates. It the year ended 31 March 2010, Medi-Clinic recorded R17.141bn in revenues, with the bulk of this (R8.335bn) in Switzerland.
The main difference between the groups is Life Healthcare’s local focus. Apart from plans to enter markets in Turkey and India, and a brief foray into the UK, the company is based entirely locally.
Eight pages of risk
Should you queue up to buy shares in the new listing? The Life Healthcare prospectus includes eight pages of risk to make sure prospective local, US and UK investors are informed of the possible stumbling blocks to ongoing profitability. Potential shareholders will appreciate the transparency – if nothing else…
Risks to Life Healthcare (and other private hospital groups) include:
· National Health Insurance – whether the system is fast-tracked or implemented over time, there is a strong possibility private hospitals will be drawn into government’s infrastructure pool. This will mean private hospitals lose some (if not all) of their autonomy in admissions policy and pricing.
If you can stomach these and other risks then you might take a ‘gamble’ on a couple of Life Healthcare shares. But it might be wise – given the high rating on the medical sector right now – to stick with one of the tried and tested listed opportunities with extensive offshore exposure. We think Netcare and Medi-Clinic’s 50% plus offshore exposure make them much safer bets than Life Healthcare in the long-term.
Editor’s thoughts: The fact three world class private hospital groups can generate profit in South Africa suggests the private hospital industry is in good shape. But any changes in the mix of private / public healthcare provision could seriously affect the profitability of locally based hospitals. Would you consider purchasing shares in a listed private hospital group given current political concerns? Add your comment below, or send it to gareth@fanews.co.za
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