Life Healthcare is one of the three major private healthcare operators in South Africa. It recently announced the acquisition of 95% of UK-based Alliance Medical Group, which will spread its reach far beyond South Africa and its neighbouring countries.
Life Healthcare’s performance
Over the past year, Life Healthcare shares have declined by 14%. However, Chantal Marx, investment analyst at FNB Securities notes that including the dividend it would have returned -10%.
“For historical context, the shares reached an all-time high in September 2014 just above R47. Over the course of the past 12 months the shares peaked at around R40 in early November 2015, dipped to just over R31 in January 2016 and then spent most of the period July – September above R38. With the recent announcement of a sizeable offshore acquisition and a rights issue in Q1 2017, the shares have traded down to R31.72 as at 21 November,” says Craig Pheiffer, chief investment strategist for Absa Stockbrokers and Portfolio Management.
The competition
On the JSE, Life Healthcare’s main competitors are Netcare and Mediclinic. Pheiffer explains: “Netcare with a market cap of R51 billion and operations in SA and the UK; Mediclinic with a market cap of R98 billion and operations in Switzerland, SA and the Middle East. Life Healthcare with its market cap of R33.5 billion rounds off the top three in the sector.”
Marx highlighted that the main difference between these competitors is their exposure offshore. Prior to its acquisition of Alliance Medical Group, Life Healthcare was largely in emerging markets, with exposure to South Africa, India and Poland. The acquisition extends this reach into parts of Europe and the United Kingdom.
By contrast both Netcare and Mediclinic have exposure in the United Kingdom already, with Mediclinic also enjoying exposure in Switzerland and the United Arab Emirates.
Grant Meintjes, head of securities at PSG Wealth adds:
- Life Healthcare – only approximately 1% of operating profit generated offshore.
- Netcare -14% of operating profit generated offshore.
- Mediclinic cannot really be compared to the rest, as more than 63% of its operating profit is generated offshore.
“There is also a smaller up-and-coming Day Hospital group listed on the JSE called Advanced Health,” adds Marx.
Life Healthcare acquires Alliance Medical Group
With Life Healthcare now having exposure to the UK market through its acquisition of Alliance Medical Group, this could affected the group’s performance and revenue.
According to Marx, the initial response to the acquisition announcement was negative as the market was nervous about the price paid for Alliance Medical Group, the financing of the acquisition, and the strategic fit, as it is a diagnostic specialist rather than a hospital group.
Pheiffer revealed that Life Healthcare’s management has explained the merits of the deal as diversifying earnings more geographically to take revenues outside of SA from 4% to 24% while at the same time being aligned to the longer-term strategy of growing the business into lines that complement existing medical services. However, he added that the market has focused more on the size of the deal and the funding mechanism of a rights issue, than on the increased overseas revenue.
“With an initial cash payment of £500 million (about R8 638.19 million) and a deferred payment of around another £40 million (about R691.06 million), the deal is large in comparison to Life Healthcare’s own market capitalization of around £1900 (about R32 825.14). With the company announcing that a rights issue will follow in Q1 2017, the shares have fallen substantially already. The market may also be making comparisons with Mediclinic’s share price (down from R210 in June 2016 to the current R133) on the back of a weaker than expected trading performance from Al Noor, its recently acquired subsidiary in the UAE,” said Pheiffer.
What to consider when investing in Life Healthcare
According to Meintjes, investments in the hospital industry are normally lower risk investments due to the high barriers. He also noted that healthcare is a highly regulated industry, and this regulation remains beyond the control of management. A higher disease burden and aging population should also support the demand for healthcare, and in turn healthcare facilities.
Marx adds: “Making an investment choice can become extremely complex and professional investors look at a myriad of factors before investing in a specific company. Some of the metrics that carry some weight includes the PE (price earnings) ratio and dividend yield of a company as well as its potential earnings/dividend growth rate. The growth rate will incorporate industry, geographic, and company expectations.”
