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Mediclinic is ailing in the Middle East

Tough regulatory environment bites earnings for SA’s largest private hospital group.

Mediclinic International’s global acquisition spree is costing the private hospital group as it’s starting to feel the pinch mainly in the Middle East.

Underscoring this is that Mediclinic’s underlying half-year earnings per share decreased by 26% and ebitda margin fell to 17.1% compared with 19.7% last year, as its recently acquired Al Noor Hospitals Group in the United Arab Emirates (UAE) hit profits.

This didn’t bode well with investors, as Mediclinic’s shares finished 9.7% lower on Thursday.

 

Mediclinic International share graph

 

In October last year, Mediclinic acquired Al Noor for around £1.4 billion (R23 billion) – doubling its presence in the Middle-East and diversifying further outside of South Africa. 

Reasons behind its declining earnings include the issue of shares to acquire Al Noor and an increasingly tough regulatory environment in the Middle-East.

On the latter, big amendments followed in July to Abu Dhabi’s health insurance programme called Thiqa by the health authority – stipulating that patients will pay more for healthcare at private facilities.

Thiqa cardholders will now pay 20% of the cost of treatment at private hospitals – previously the plan fully covered the cost of all procedures at private healthcare facilities. This has now been reduced to 80% in a bid to promote the use of state hospitals. 

As a result of the regulatory changes, Mediclinic’s CEO Danie Meintjes says the group has seen a significant reduction in Thiqa patient volumes since the amendment to the state’s health plan.

Mediclinic’s Middle East operations – which includes five hospitals and 27 clinics with 687 beds – saw Thiqa outpatient volumes as a percentage of total patients fall to 14.7% from 21.6%. And inpatient Thiqa volumes as a percentage of total patients fell to 12.3% from 19.9%.

“Management is actively addressing these challenges with the relevant stakeholders and government departments,” says Meintjes.

However, Electus Fund Managers analyst Neil Brown says the amendments to Thiqa brings uncertainty as to where patient volumes will settle.

SA’s largest private hospital group by market capitalisation (R113 billion at the time of writing) was also impacted by the late opening of the Al Jowhara Hospital in Al Ain, the UAE, following licensing delays. 

Meintjes believes that long-term growth will be in the Middle East given the growing and ageing population which gives rise to the demand for medical services.

Mediclinic is expected to generate annualised cost synergies of AED 75 million (R283 million) in the second half of the 2016/17 financial year due to its combined Middle East platform that will see it consolidate its offices, create procurement and headcount synergies.

Says Kagiso Asset Management’s associate portfolio manager Aslam Dalvi: “While the margin pressure in the Middle East was well flagged in previous updates, reported results were still below expectations. Disappointingly, guidance for the Middle East was also lowered on the back of a weaker outlook for the UAE operations.”

Rest of the group

The rest of the group remains strong, with revenue growing by 27% to £1.2 billion (R20 billion) and operating profit by 10% to £169 million.  An interim dividend of 3.2 pence was declared, which is 20% higher than the previous corresponding period.

Its Southern African operations, with hospitals in South Africa and Namibia, grew revenue 8% to R7.3 billion. In pound terms, revenue by 4% to £364 million (R6.3 billion). Mediclinic collectively operates 52 hospitals and two day clinics with a total of 8 043 beds in both regions.

Its bed occupancy rate in Southern Africa increased to 74.2% from 73.6% and revenue per bed day grew 5.5%. “There is also a shift to more medical cases and less surgical/theatre cases, which hurts profitability,” says Brown.

Switzerland is the biggest revenue contributor for Mediclinic in pound terms through its subsidiary Hirslanden which grew revenue by 15% to £613 million (R10.5 billion).

Brown says Mediclinic’s financial year to March 2017 will be poor, but the financial year to March 2018 should see a decent financial performance.

“On the positive side, Mediclinic always deals aggressively & appropriately with its problems & challenges. The share price of ±£8 or R140 is now looking like a good entry point for longer-term buying,” Brown adds.

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Mediclinic needs to have a prominent facility in the US and should punt it in the Middle East! They tend to think everything for the US is great.

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