Some sales lost during lockdown are lost forever. The money not spent on restaurants, hotels, holidays and haircuts during the lockdowns will not result in more being spent on these items now that the restrictions have been lifted.
On the other hand, those who needed knee replacements, back surgery or other so-called ‘elective’ medical procedures and delayed them due to Covid, will still need these procedures in the future.
Those sales are not lost but have been shifted into a future period as pent-up demand.
While hospital groups around the world struggled with Covid volumes, this was aggravated by large volumes of these ‘electives’ being postponed.
Importantly, the latter are often the high-margin part of hospital revenues and, as businesses with high operating leverage, are key in driving bottom-line profits.
Hence, many have reported poor results over the last two years and have seen their share prices slide.
Importantly, though, at some point the pent-up electives come back to hospitals around the world.
Indeed, all indications are that this is currently happening in South Africa.
The operator of the second largest open medical aid in South Africa, Afrocentric Group (share code ACT), reported in its FY22 results presentation (slide 4) that: “Electives are increasing to pre-Covid levels.”
Discovery (DSY) has made similar assertions, if not so explicitly.
Life Healthcare (LHC), in a voluntary trading update for H1:22 (ending March 2022) notes that in its southern Africa hospitals segment “since mid-January we have seen a strong recovery in a broad range of surgical and medical activities in our hospitals”.
“This has resulted in underlying PPDs [paid patient days] growing 2% year-on-year. Average occupancies in H1-2022 were c.58%, versus 57% for H1-2021, but understate the average occupancy level of c.66% seen over the last 8-10 weeks.”
Mediclinic (MEI), in its FY22 trading update (for the year ended March 2022), notes that management: “Expect[s] positive momentum in client activity to drive revenue growth and margins in the coming year.”
Finally, Netcare (NTC), in its H1:22 trading update (importantly also for the period ended March 2022), expressly states that: “From late January 2022, as we emerged from the fourth wave, an increase in non-COVID-19 activity has been experienced, with activity levels in the month of March 2022 achieving the highest acute and mental health occupancy levels since the onset of the pandemic.” It goes on to say how “… full week occupancy levels within acute hospitals increased to 55.5% in H1 2022 from 53.8% in the comparative period, with average occupancy across February and March 2022 of 62.4%”.
Assuming no material future Covid waves (admittedly hard to call) and that February and March occupancy levels continue for the remainder of the year, it is quite clear that the domestic hospital groups should shoot the lights out.
Not just is Netcare well positioned from being the most exposed to (South African) acute volumes (with growing mental health; sadly likely a long-term beneficiary of lockdown), but its share price has also been hurt the most (down by about a quarter since the start of the pandemic).
Compared globally, all our hospital groups appear relatively cheap
Yet, amid this comparison, Netcare’s inherent profitability implies that it is relatively more undervalued than either Mediclinic or Life Healthcare. Mediclinic remains entangled with underperforming foreign operations while Life Healthcare is distorted by imaging and UK operations.
In conclusion, an underappreciated ‘reopening trade’ is to be found in the broader hospital sector.
Indeed, the South African hospital sector appears relatively undervalued. And, more granularly, the best option among our domestic hospital groups appears to be Netcare.
Now we just need to watch for any future Covid waves …
Keith McLachlan is investment officer at Integral Asset Management.