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Advancing one hospital at a time

How do investors navigate Advanced Health’s three-year profit wait?

Day hospital developer Advanced Health is on a growth spurt in both Australia and South Africa as patient numbers are on the up. But growth comes at a price, costs are high, profits elusive and the share price is taking a knock.

Adding to investor concerns, its latest trading statement revealed at least a 100% y/y expected increase in the loss of headline loss per share, for the year ended June 2017. It warns that this is the cost of growth.

In February it declared an interim headline loss per share of 10.52 cents per share (cps), down from HEPS of 0.51 cps in the comparative period. The share price is down 10.6% in the year to date.

 

Advanced Health

With health care costs spiralling out of control, it’s critical to find areas where costs can be reduced, while not compromising patient care. “This model has been proven globally, and Advanced is attempting to successfully replicate it here in South Africa,” says Shmuel Simpson, 36ONE Asset Management analyst.

Compared with the US, South Africa is heavily under-invested in day clinics and Australia’s not dissimilar, adds Andrew Dittberner, Old Mutual Wealth Private Client Securities CIO.

The company has identified a gap in the market and aims to disrupt the private healthcare system for outpatients. It has ten operational day hospitals in South Africa and is gearing to grow to 20 hospitals in SA and six in Australia (PresMed Australia) by 2020.

The big advantage of day hospitals appears to the cost saving. “…their offering can save both funders and patients around 35% of the cost of surgical interventions performed at acute hospitals,” says Devin Shutte, head of investments at private wealth management company The Robert Group.

Read: Is it too late to rein in soaring healthcare costs?

“Demand in South Africa has been robust, with local patient numbers now making up 50% of the group’s total. Although adoption has been slower than expected, we are seeing medical aids continue to favour [certain] procedures in these facilities, as they are generally cheaper to perform,” Shutte adds.

Discovery Health Medical Scheme, GEMS and Bestmed included day hospitals on their list of designated service providers network at the start of 2017.

Advanced also has working partnerships with medical practitioners, who get a shareholding in their day hospitals. “We believe that this is to the advantage of patients, [and] helps with the continuous improvement of quality protocols applicable to our hospitals as well as the cost effective delivery of healthcare services,” says Carl Grillenberger, CEO Advanced Health.

Joint ventures between the surgery centre and doctors are part of a growing global trend. “Doctors view the centres as their own,” 36ONE’s Simpson says. Collaboration with other hospitals also makes sense as the day centre can free up acute facilities to focus on long-stay patients. 

Advanced Health sees growth opportunities in low-cost medical scheme members and state patients through private-public partnership opportunities.

Capital raising

Advanced is planning a rights issue at the beginning of the third quarter (originally Q2). This additional capital, plus the injection of added professional skills will be positive for the group, says Shutte.

Advanced is also planning to link up with a suitable BEE investment partner. Part of this link-up will involve the raising of additional capital (BEE partner gets 25.1% interest). It’s in discussion with interested BEE partners and planning to finalise discussions over the next twelve months.

According to Simpson, this makes sense. “The business requires substantial capital to build new centres. Since the company is still not generating substantial cash from its operations it will require external capital to grow.”

While Keith McLachlan, AlphaWealth fund manager, questions management’s judgement. “Why did they not raise sufficient capital on listing? Either their capital raise was too small for their plans or their investments since listing are not generating sufficient returns to self-fund its pipeline. Neither alternative is good.”

Dittberner flags the lack of information to investors about the capital raising regarding the price and who the potential investor is. “As a result, there could be a material dilution, alongside the fact that an additional R100 million is earmarked for a BEE investor…. Shareholders require transparency, of which there is little.”

Grillenberger says Advanced needs the additional capital to assist with expanding SA operations; transfer part of the funds to Australia to fund expansion there; and enhance its debt/equity ratios.

Red flags

Dittberner is concerned by its desire to grow “too quickly”.

“Given their recent expansion efforts, it may be wise to bed those down before embarking on further expansion, which has the potential to put the business under strain. Given the under investment in this space, there should be sufficient opportunities in the future….”

McLachlan adds that the investment plans are drawing down on capex.

Competition’s also rising. “There is a perennial shortage of medical professionals in South Africa, for which Advanced is one of the many competitors. There is also the risk that the established hospital groups start investing significantly in their own day hospital facilities,” Shutte points out

Analyst views

Advanced’s shareholders are currently investing into the group’s expansion cycle, and have plans to build a strong future revenue stream, says Shutte.

Advanced has said its new hospitals need a settling-in period of up to 36 months before achieving profit.

It can take between 18 months and two years for a new day hospital to break even, in some cases even longer depending on the volume of patients treated per year. However, Grillenberger believes they are on the right track.

Analysts are divided between patience and caution.

Simpson:

  • The industry’s growth prospects are strong, but it may take longer than expected for sustainable profits to show.
  • This is a long-term play – don’t expect overnight profit.
  • With SA’s big three hospital groups rolling out their own day surgery centres, the industry will grow, but it’s not certain if Advanced will be the greatest beneficiary.

Dittberner:

  • Given the micro-cap size of the business, investors must be prepared to ride out volatility (not to be confused with risk which must be assessed from a financial strength, industry dynamics and management capability point of view).
  • Investors may need to satisfy themselves regarding management’s strategy. If it goes into an investment portfolio, it shouldn’t make up a material position, and should be seen as a speculative investment. 

McLachlan:

  • The stock is too illiquid for many investors, so this needs to be viewed on a case-by-case basis.

Shutte:

  • The current share price could offer a good entry point for new investors.

 

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I have to keep thinking that the reason for the big losses is not because there is no income, but because huge and excessive salaries must be being siphoned off of this company. With medical costs at an all time high and no shortage of patients, then there is a fox in the hen house.

Any bets on Advanced coming up with a rights issue soon to siphon more cash from their shareholders to pump into the pockets of the directors in the guise of fees? If they do this then a forensic audit may just be called for from some shareholders.

End of comments.

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