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Psychiatric clinics could boost Netcare in medium term

Healthcare group adds 51 mental health beds in six months.

South Africa’s third-largest private hospital group, Netcare, has seen a 20% rise in day patients in mental health facilities in the last year, including contributions from two Akeso psychiatric facilities in Pretoria and Nelspruit, which were opened in 2017 and 2018 respectively.

Speaking at the release of Netcare’s interim results to March 2019, chief executive Richard Friedland said the group had added 51 mental health beds in the last six months, with 28 beds in Parktown and 23 in George. “There is a global increase in mental health issues, several of which are stress-related,” he says, adding that the group has also seen a link between mental disorders and depression and substance abuse.

“When we see an acute disorder such as a cold, you can diagnose and treat the patient within a relatively short period. Mental health problems, however, tend to be of a chronic nature and there are often psychological and social elements that are complex when it comes to successfully reintroducing the patient to the stresses of a work environment.”

The World Economic Forum (WEF) tells us that the 21st century has seen a worldwide epidemic of mental health and related diseases. However, while mental health encompasses a wide range of issues including depression and anxiety, the WEF states that anxiety disorders top the list, with an estimated 275 million sufferers globally.

Neil Brown, co-head of Electus Fund Managers, notes that while Netcare may have paid full price for Akeso in March 2018, this is likely to be the fastest-growing sector within Netcare in the medium term. “Mental health is a fast-growing industry both globally and locally,” he says. Netcare paid R1.3 billion for the Akeso network of 12 mental health facilities, which, at the time, boasted 811 beds across Nelspruit, Cape Town, George, Johannesburg, Pretoria, Umhlanga and Pietermaritzburg.

Positive exit from the UK

Looking abroad, Brown says Netcare’s exit from the UK market has been a positive move. “The UK assets were performing poorly in a weak UK private sector. This was unlikely to improve without an alignment between the hospital properties and operating hospital businesses, as well as a rent reduction and meaningful investment in the hospitals,” he notes.

Reducing reliance on Eskom

A 24-hour, 365-day healthcare company can never really switch the lights off, and Netcare has suceeded in reducing its reliance on Eskom. Since 2013, the group has improved its efficiency, using 22% less electricity per bed. It aims to increase this to 30% in the next five years.

Friedland says the group has a fleet of 200 generators with a capacity of 76 004 kilo-volt-ampere (kVA) and 52 individual solar photovoltaic installations with a 9.1 megawatt-peak rating that can generate 15.5 gigawatt hours.

Netcare’s sustainability initiatives include a plant at Netcare Christiaan Barnard Memorial Hospital that drains sea water from underneath the hospital and desalinates it.

“Between this plant and boreholes at all four hospitals as well as Medicross and National Renal Care facilities in the Western Cape, we are able to continue operating should the region run out of potable water,” Friedland says.

He believes the healthcare group is well-positioned to withstand disruptions to business caused by the unstable supply of electricity from the national grid and water shortages.

Local outlook

Netcare expects the number of patient days for both acute and mental health care to increase to 3.5% in the 2019 financial year.

However, Brown says that on a like-for-like basis, Netcare’s acute hospitals “probably had worse SA patient day growth [-1%] versus the flat volumes for both Life Healthcare and Mediclinic, whose comparable results will be released in the next two weeks.

Friedland attributes the decline in acute patient days primarily to ongoing funder case management activity, most notably with regards to the introduction of new hospital networks effective January 2019. “Although the number of medical scheme members in South Africa remains stagnant, there has been an acceleration in the number of hospital networks introduced by medical schemes,” he says. A final report from the Competition Commission regarding the functioning of the private healthcare market and potential barriers to effective competition is due to be released in September.

Share price slips on interim results

Netcare’s group revenue from continuing operations grew 5.6% to R10.5 billion, while normalised group profit after tax fell 7.9% to R1.1 billion. Adjusted headline earnings per share from continuing operations dropped 3.9% to 84.3 cents. Shareholders saw a 6.8 % increase in the interim dividend, which was 47 cents per share.

“Hospital and healthcare shares have fallen sharply in the past few years and are now fairly priced in the market,” says Brown.

Netcare shares slipped 3.27% to close at R22.48 on Monday.

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