JOHANNESBURG – Healthcare company Advanced Health (AVL), which provides short-procedure surgical facilities in day hospitals in South Africa and Australia, has made an offer of 100 million ordinary shares at R1 each on the JSE’s Alt-X counter in order to raise capital for greenfield projects.
Speaking at a pre-listing presentation in Johannesburg on Thursday evening, AVL founder and CEO, Carl Grillenberger, said that day hospitals offered a significant lever to manage healthcare charges in light of spiraling hospitalisation costs.
As a percentage of total medical scheme spend, hospital costs rose from 24% in 1990 (R1.26 billion) to 37% in 2010 (R28.3 billion), according to the Council for Medical Scheme (CMS). This is expected to reach 40% in 2015.
“More than 60% of all surgical interventions can be done at day hospitals, which can save in the region of 35% of the costs involved for both funders and patients,” Grillenberger said.
He pointed out that Discovery Health was now paying surgeons a 30% surcharge on approved surgery fees for procedures performed in a day hospital. “We expect other medical schemes to follow Discovery’s example in order to reduce the disproportionate increase in private hospital costs. There is substantial growth potential for the day hospital industry into the future,” Grillenberger continued, noting that the general/day hospital split is 279/302 in Australia and 6 700/6 000 in the United States.
In South Africa, the split is 235/45.
Building new facilities
Currently, AVL has two day hospitals in South Africa and three in Australia. In South Africa, it owns the Medgate Day Clinic in Roodepoort and the eMalahleni Day Hospital in Witbank. “We have obtained a license to develop a day hospital in Soweto, where there is a tremendous need for affordable hospital facilities,” Grillenberger noted.
In light of the shortage of day hospital facilities in South Africa, Grillenberger said that the predominant objective of the listing was the development of 10 greenfield projects at a cost of R10 million per facility.
He said that AVL was in serious discussion with a number of groups who had already obtained licences to build hospitals but did not have the funding to develop the facilities. It was also negotiating with parties who had existing facilities that could be turned into day clinics.
Management remains largest shareholder
AVL’s current issued share capital comprises 110 831 514 ordinary shares. Of the 100 million ordinary shares on offer, 20 million have already been allocated to pre-IPO investors. These are made up mainly of stakeholders previously involved with President Medical Investments (PresMed), which core members of the AVL management team helped to establish in 1983.
The public offer for the remaining 80 million shares will be made in April, with April 25 set as the target date for listing. A prospectus will be issued on March 31 ahead of the initial public offering (IPO).
Once share capital has been increased to R210 831 51 ordinary shares, non-controlling shares will account for roughly 40%.
Family trusts, of which the directors are trustees, will be the biggest shareholders, at least for the next three years. The directors will not draw a salary, opting instead for share options in the region of 2 million shares per year over the next three years, provided they still work for AVL.
By leveraging the new capital with an 80:20 equity: borrowing ratio, AVL will be able to invest an additional R42 million in growth prospects.
AVL will not offer dividends for the first three years, as the money will be reinvested into its greenfield operations. “We are aiming for sustainable long-term growth,” said CFO Cor van Zyl.
AVL projects that if each day hospital can service 300 patients a month, bottom line profits will be significant. The break-even point would be 120 patients a month.
Currently, AVL derives 80% to 90% of its revenue from its Australian businesses, where profit and revenue are growing in the region of 5% to 6% annually.
The group’s revenue grew from R92.5 million in 2012, to R126.2 million in 2013. It projects this figure to grow to R154.9 million in 2014 and reach R203 million by 2015. Net profit after tax is expected to fall to R15 million in 2014 (2013: R16 million), due to listing-related expenses, but projected to climb to R22.4 million in 2015.
Income earned/projected years ending June 2012 – 2015
Source: Advanced Health
With experience establishing PresMed, which developed day hospitals in South Africa and became part of what would eventually become Life Healthcare, Grillenberger said that Advanced Health would hope to list on the JSE Main Board in future.