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Mediclinic shares lift on positive trading statement

Guidance for SA margins perhaps the one ‘downside surprise’.

A detailed trading update from healthcare provider Mediclinic International, released on Wednesday morning, appears to have reassured the market, with analysts and the share price alike responding favourably.

Equity analyst Roy Campbell, of Morgan Stanley, says the trading update will restore lost confidence and is likely to have a positive impact on the company’s share price. “Mediclinic continues to face serious headwinds, which we think the company has handled admirably. Guidance for Switzerland and South Africa is for lower margins, but the market should be expecting this. Given the environment, it’s not likely that we will see a significant re-rating from these levels,” he said.

Campbell noted that management had been proactive in terms of managing agreements with funders and a new agreement would likely give the company breathing room, with particular reference to the Switzerland operations. UBS said in a statement that it believed the market would take comfort in Mediclinic’s Swiss performance as it may reflect management had improved visibility into the changing landscape.

Part of the regulatory issues in Switzerland included the introduction of six clinical procedures that moved from inpatient tariffs to outpatient tariffs from January 1 this year. Dr Ronnie van der Merwe, group chief executive officer of Mediclinic, said revenue for the year to March 2019 in the Swiss-based Hirslanden was up 2.5%, while Hirslanden’s outpatient revenue was up around 7%.

South Africa downside surprise

When it comes to the group’s South African operations, Campbell notes that the extent of management’s guidance for South Africa margins – to be 100 bps lower in FY20 – is perhaps the one downside surprise in Wednesday’s announcement.

“However, much of the pressure stems from the integration of Intercare, which is lower margins and includes leasehold payments, as well as the impact of the ramp-up of Stellenbosch Hospital, and then the investment in clinical staff.

“We think the ramp-up alone is not a sustainable impact, and so expecting lower margins over the medium term is a fair call. Lowering our forecasts to meet guidance would not be a significant change to our FY20 estimates so we are leaving them unchanged,” he said.

UBS had a similar outlook, pointing out that key risks in the South African hospital sector are government regulation, slow approval of new beds, low growth in low-cost networks and nursing shortages. UBS said in its statement that Mediclinic is faced with regulation hurdles in all its operating regions:

  • South Africa – Competition Commission and proposed National Health Insurance (NHI);
  • Switzerland – new system impacting margins and potential lower subsidies from the state; and
  • UAE – potential implementation of the DRG system and 20% co-payment for Thiqa members. The DRG system is a patient classification scheme which provides a means of relating the type of patients a hospital treats to the costs the hospital incurs.

Looking at the group’s Middle East operations, Mediclinic anticipates revenue growth of around 10% on the back of the continued ramp-up of the new Parkview Hospital. Van der Merwe says a gradual improvement in the Ebitda margin is expected in FY20, rising to around 14% incorporating the ramp-up of the Parkview Hospital; investment in the hospital expansion and the new cancer centre at Mediclinic Airport Road Hospital, scheduled to open in the first half of 2020.

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