Market analysis: Healthy prospects for Mediclinic

The greater size of Mediclinic allows for economies of scale in the region. This would enable the group to operate profitably on a lower tariff, if necessary.

The merger of Al Noor Hospitals and Mediclinic took effect on February 15 this year. Ravindranath K / The National

CAPE TOWN // While a handful of investment firms have lowered their ratings on shares in Mediclinic International, a leading equities analyst in Johannesburg says the company’s takeover of Al Noor Hospitals will boost the shares’ performance in the long run.

The two medical providers agreed to the link-up last October, when the London-headquartered Mediclinic paid £1.5 billion for the UAE company, and in March the entity was listed on the London Stock Exchange.

In May the full costs of the transactions became apparent when Mediclinic released its annual results, showing that revenue grew 6.6 per cent to £2.1bn, but its after-tax profit fell 25 per cent to £190 million.

The decline in profit and a reduced dividend, combined with currency concerns, led to several brokerages cutting the firm’s rating from a buy to a hold. However, according to Johannesburg-based Alec Abraham, an equities analyst at Sasfin Banking and Financial Services Group, prospects for Mediclinic look good in the long term.

"Despite the expected slight net negative impact of the coverage reduction, I am positive on Mediclinic's acquisition of Al Noor Hospitals as it expands the size of the business in the Middle East, which has been a very strong growth region for Mediclinic", Mr Abraham told The National.

The acquisition means the group has 73 hospitals and 45 clinics around the world. Of these, 49 hospitals and two day clinics are in South Africa and three hospitals are in Namibia. Mediclinic’s Swiss subsidiary Hirslanden operates 16 private acute care facilities and four clinics in Switzerland, and Mediclinic Middle East operates five hospitals and 39 clinics in the UAE. It has also expanded in the United Kingdom by acquiring 29.9 per cent of the London-listed Spire Healthcare.

Mr Abraham said the greater size of Mediclinic allowed for economies of scale in the region. This would enable the group to operate profitably on a lower tariff, if necessary.

Recently The National reported that the Health Authority Abu Dhabi had announced the reduction of its insurance coverage for Emiratis and expatriates and their families covered by Daman Insurance's Abu Dhabi Basic Plan. Previously, the plan fully covered the cost of all procedures at private health centres.

The amended Abu Dhabi Basic Plan could also mean that workers over 40 years old may have to pay up to 50 per cent of their policy’s premium. In July. Alex Comer, an equities analyst at JP Morgan, said: “While difficult to quantify, we are nervous regarding recent announcements related to reductions in the level of reimbursement for Thiqa-insured Emiratis and also expats covered by Daman’s Basic Insurance Plan”.

JP Morgan has since downgraded the outlook of Mediclinic shares from overweight to neutral. Fellow South Africa-based financial services firm Investec also reduced its rating for Mediclinic to a hold from a buy, as have Deutsche Bank and Renaissance Capital.

“The share has had a good hard run over the past month or so of about 30 per cent, which leaves little room for finding value at this level,” said the healthcare analyst at Renaissance, Robyn Collins, in Johannesburg. “But it still has the underlying value I’m looking for in a share.”

Since the London listing the company's share price has spent much of this year trapped in a range between 850 and 900 pence. Since June, however, it has climbed to the 1,100 pence range; on Wednesday it was at 1,087 pence. Mediclinic was also listed as one of the top five stock picks by South Africa's Sunday Times newspaper. For the year to date, the shares were up 36.6 per cent as of Wednesday morning.

South African fund managers are drawn to locally listed stocks that have offshore exposure because local exchange control laws severely restrict how much money they can invest overseas. Mediclinic also trades on the Johannesburg bourse, so fund managers can buy shares in the local currency, the rand, while benefiting from earnings in a variety of currencies. This helps to offset the decline in value of shares earning in rands only, particularly as the currency is now one of the world’s worst performers.

Some investors have raised concern over currency volatility and its effect on Mediclinic’s share price, as the company is exposed to the pound through its UK listing. Still, its earnings in stronger currencies such as the dirham should prove a plus, Mr Abraham said.

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