What’s behind Life Healthcare’s troubles in the UK
Group’s interim earnings plummet on Alliance Medical acquisition
Life Healthcare’s expansion into the UK significantly lowered the hospital group’s earnings for the six months to March.
Its interim results showed on Friday that establishing a sizeable international healthcare presence negatively affected earnings per share. Earnings per share dropped 85.3% to 13.7c, and headline earnings per share declined 71.3% to 26.7c.
Life Healthcare said group earnings were affected by one-off items related to the R14.3bn Alliance Medical acquisition including the transaction’s costs of R254m and acquisition funding costs of R382m.
It paid the debt with two bridging facilities and R8.8bn it had raised in a rights issue.
Sanlam Investment Management equities head Patrice Rassou said most hospital groups had a deliberate strategy to venture outside SA in search of larger markets.
Gryphon Equity analyst Casparus Treurnicht said the offshore move by Life Healthcare indicated that management expected little growth in the South African region.
The company defended its grand expansion, saying that the UK had a high incidence of cancer and Alliance offered the facilities to service that market.
Life Healthcare Group CEO André Meyer said the acquisition of Alliance Medical accelerated Life’s geographic diversification, increasing both revenue and earnings before interest, tax, depreciation and amortisation (ebitda) outside southern Africa.
"It further continues Life Healthcare’s expansion of its complementary services business adding diagnostics to mental health; acute rehabilitation; renal dialysis and oncology, firmly positioning Life Healthcare in a strategically important high-growth business."
Results were also negatively affected by a tariff reduction of 11% in Poland, where Life has 12 inpatient cardiology centres. The cutback resulted in additional impairments of R142m on Life Healthcare’s Polish investment.
Rassou said the decline in earnings came as no surprise because the industry as a whole had come under pressure because of stringent approval processes for hospital stays by medical aids and dropping occupancy levels.
Life Healthcare reported patient days fell 1% from 2016, however, revenue from South African operations increased 4.7% to R7.6bn, compared with R7.3bn in the previous year. More than 90% of Life’s operational income comes from SA, where ebitda margins declined to 26.0% from 27.7%.
Treurnicht said regulatory risk still remained in most markets as it seemed there was a global push towards regulating excessive medical costs for the consumer. "This does not bode well for our healthcare stocks. In Poland, for example, margins fell from 13.5% to 5.1% and this is a clear indication that they overpaid while the regulator had other ideas," he said.
Despite the various challenges, the company reported revenue increased 22.6% to R9.6bn, pushed by South African operations that were driven by higher revenue per patient, R1.5bn in new revenue from Alliance Medical and R530m from Poland.