Does Advanced Health need a shot in the arm?
While the case for its day-hospital model is strong, the firm’s financial statements suggest it may need a cash injection
The day-hospital prescription written by Advanced Health would appear to be the antidote to rising medical costs in the private hospital sector.
The company, in a presentation covering the interims to end-December, argues that private hospitals are the main drivers of health care in SA, but adds that 70% of procedures can be attended to at substantial savings in day hospitals.
On paper, Advanced’s day-hospital model looks a healthy alternative to the (largely) default private hospital offering.
On the financial statements, unfortunately, the proposition still looks weak and perhaps due for another injection of capital.
The company raised R86m in a rights issue last August, though directors switched loans into equity as part of the exercise.
Advanced is still burning through cash. The cash-flow statement shows a net cash outflow of R14m. This is, at least, a marked improvement on the previous interim period’s R22m outflow.
The problem for Advanced is that its more mature Australian operation is not kicking in enough cash to sustain the development costs of the SA day-hospital rollout.
A divisional breakdown shows revenue from Australia growing markedly to R147m, but profits trickling in at R2m. The local operations generated a top line of R53m — but posted a hefty loss of R22.3m. Gross margins were squeezed to 48% from 50% previously.
What is encouraging is that the "cases per quarter" recorded at Advanced’s network of day hospitals grew from just 826 in the first quarter of the 2016 financial year to 3,264 in the first quarter of the 2018 financial year, and patient numbers will likely grow as the facilities are rolled out.
These numbers lend some credence to Advanced CEO Carl Grillenberger’s contention that the number of specialists involved at day hospitals is growing, and that medical schemes are increasing support.
Grillenberger also says that in the past two years the Day Hospital Association of SA grew from 28 to 45 members.
While most investment analysts agree that the day-hospital model is the future of affordable private health care, there remains a worry around whether there is enough financial firepower to carry Advanced to its profitable goal.
The company will be opening two new facilities this year, which will bring the number of day hospitals in SA to 11.
It takes up to 18 months to establish a new day hospital, which then requires a "settling-in" period of up to 36 months before profit is achieved. This probably means expansion will only really accelerate once Advanced is cash-flow positive.
One positive is that equipment purchases have decreased — which should bode well for the future cash flows for Advanced.
Grillenberger believes Advanced is on the right road.
"Change takes time to materialise," he says. But he concedes that too many facilities were opened over a short period of time, and that the buy-in from specialists took longer than expected.
The second half will be critical in terms of restricting cash flows further and reinforcing the gross margins.
As things stand, Advanced is trading on the JSE’s AltX market at levels that are close to the last stated tangible NAV of 64c/share. That is a dismissive valuation for what is largely a services business.
Gut feel is that Advanced would probably not want to pursue another rights issue at these levels. But without more meaningful cash flows, the company will battle to build a business of sustainable scale.
Of course, at prevailing share-price levels there may be a few well-heeled investment counters that want to examine Advanced more closely. Here one might think of cash-flush counters such as Hosken Consolidated Investments or PSG Group — neither of which has existing health-care interests — or Brimstone and African Empowerment Equity Investments, which both have experience in the health sector.