Netcare targets mental health
The private hospital group pays R1.3bn for Akeso Clinics to diversify its local business
Private hospital group Netcare has agreed to buy Akeso Clinics for R1.3bn, as it seeks to capitalise on growing demand for mental healthcare services, it said on Monday.
Akeso is a chain of 10 psychiatric health facilities, with two more under construction.
Like its biggest rivals, Life Healthcare and Mediclinic International, Netcare faces constraints in acquiring new hospital licences in SA and has tried to diversify its local business and expand offshore. In addition to its 53 hospitals in SA and Lesotho, it owns the UK’s biggest private hospital network, BMI Healthcare, which has 59 sites.
"The incidence and prevalence of mental health disorders is increasing at a rapid rate and Netcare is underrepresented in this space. This will provide us with a really good platform to grow and expand mental healthcare services," said Netcare CEO Richard Friedland as the company released its annual results for the year to end-September. The acquisition, which was yet to be approved by the regulatory authorities, was expected to be earnings-neutral in the first year and accretive thereafter, he said.
Shmuel Simpson, an analyst at 36One Asset Management, said the acquisition looked like a good opportunity as mental healthcare was a growing market. "It looks like a nice bolt-on," he said.
Netcare reported a 57% drop in aftertax profit to R1.048bn due to a R1.858bn write-down to account for changes to the retail price index swap instruments relating to its UK hospital property leases, but said the underlying business had delivered pleasing results in a difficult trading environment.
Adjusted headline earnings per share, which excluded one-off items, rose 5.6% to 199.5c. The company declared a final dividend of 57c, up 5.6% from a year ago. Normalised profit after taxation rose 19.1% to R2.9bn.
Netcare’s local business reported a 9.7% rise in revenue to R18.958bn, from R17.289bn a year ago. Earnings before interest, tax, depreciation and amortisation rose 5% to R4.147m. Patient days grew 4.7%.
Its UK business delivered revenue growth of 1.1%, rising to £895.5m compared with £886m the year before. It continued to see a shift away from the higher-margin privately funded patients to those paid for by the National Health Service (NHS). NHS-funded patients accounted for 41.6% of its caseload, it said. Friedland said demand for private healthcare was expected to remain strong despite the constrained economic environment in SA and a potential ratings downgrade, but warned the growth in low-cost "efficiency options" would place further pressure on margins.
Electus Fund Manager Neil Brown said Netcare faced challenges at home and abroad.
"Netcare SA is stable, but as per all SA hospitals, is also suffering from high cost inflation above price inflation. The other problem is the faster growth in lower-margin medical cases [compared] with higher-margin surgical cases," Brown said.
"The NHS caseload is much lower margin than private work, but Netcare has no real choice but to take on more NHS work and appropriately manage its cost structures," he said.
Regarding Capital analyst Hendrik Theron agreed, saying Netcare was "running hard to stay in the same place".
"There is constant pressure to keep costs in line with lower revenue and higher volumes. It is a global phenomenon and I can’t see it letting up," he said.