With Public Healthcare In A State Chaos Private Healthcare Is Expanding

Few people may be aware of the atrocious conditions in some of our public healthcare hospitals

. Just this past week, six premature babies died at the weekend after contracting diarrhea at the Charlotte Maxeke Johannesburg Academic Hospital's neonatal ward, where hygiene measures were lax. In another bit of shocking news, a womans decomposing body was found left covered by a blanket in lavatories in the hospital hall at the Prince Mshiyeni Hospital in KwaZulu-Natal, after three days. The South African governments focus, however, has been on struggling to curb rising private healthcare costs over the past six years, since the Competition Commission scrapped collective bargaining between medical schemes and services providers. Health Minister, Aaron Motsoaledi says that healthcare is not an ordinary commodity as you cannot really negotiate with a doctor about an operation that you require, because you may not understand what he is talking about and all you know is that you want to live. The minister of health said that he has one goal and that was to make healthcare as affordable as possible. He is proposing an independent commission to regulate prices in the private healthcare sector, paving the way for a cap on the fees that doctors and hospitals charge their patients. The former health minister, Manto Tshabalala Msimang suffered a barrage of litigation and almost all her attempts to do so foundered and got tied up in court.

South Africas second largest private hospital group, Life Healthcare, has embarked on a book-building exercise ahead of its planned listing on the JSE in three weeks time. The group aims to sell about 45% of its shares, which are expected to raise as much as R8.04-billion. The group then plans to expand its domestic footprint through acquisitions over the next three years into regions where they do not have a presence as yet. The objective is to increase its hospital beds by another 2100 from the current 8100 hospital beds it already owns in 62 hospitals. Life Healthcare will then have about 27% of the private hospital market in South Africa. The group wants to expand its reach into emerging markets such as Turkey and India, which contrasts with the strategies of its biggest rivals. Netcare and Medi-Clinic, have largely focused their international expansion plans on Western Europe. Netcare, for example, has a controlling stake in UKs biggest private hospital, while Medi-Clinic owns the Hirslanden Group in Switzerland and some smaller ventures in the Middle East. It is also important for the Life Healthcare Group to diversify its exposure to political and regulatory risks, because the opportunities for domestic acquisitions were limited by the competition authorities.

Netcare has a well balanced portfolio of healthcare businesses and operates in an industry that is unlikely to reflect reduced demand in times of economic hardship. Demand for healthcare services in both the group's markets are anticipated to increase due to a higher disease burden, particularly in South Africa, and an ageing population in the UK. However, regulatory pressure to provide greater access and reduce pricing is inevitable. Netcares defensive characteristics are reflected in its strong operating margins and a high ROE. The groups risk profile has however increased due to the integration risk of all the group's acquisitions and its high level of debt. The debt relating to the UK is, however, without recourse to the South African operations. The share is currently trading on a rolling P/E of 16.8 times, which we believe fairly values the company. We recommend investors, mindful of the risks mentioned above, to hold their shares.

Medi-Clinic operates 48 hospitals throughout South Africa and three in Namibia with more than 6 900 beds in total. Medi-Clinic Switzerland operates 13 private acute care facilities in Switzerland with 1 301 beds and Medi-Clinic Middle East operates the 120-bed Welcare Hospital and five clinics in Dubai. Although investments into the hospital industry is normally lower risk investments, due to the high barriers to entry, the group's high gearing does increase its risk profile. We do not expect a slowdown in group earnings as patient volumes are likely to remain strong despite the slowing economy aided by an increase in the number of beds available. We feel the share is fairly valued at current levels and would recommend longer term investors to hold their shares.

by: PSG Online

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