AfroCentric to focus on trimming fat while preparing for possible state scheme
Healthcare investment holding company AfroCentric is a hidden gem, founded in 2005 by former SABMiller chairman Meyer Kahn, Bidvest pioneer Brian Joffe and Netcare founder Motty Sacks.
It has a solid earnings and dividend track record, has made significant acquisitions over the past two years and the group is now more highly focused than ever. Financially, AfroCentric is solid, with no debt and R700m of cash on its balance sheet, and management believes it is wellpositioned for future growth.
Its most notable investment is a 71% holding in Medscheme, one of the country’s largest medical scheme administrators, which has 3.6-million lives under management.
Medical aids that fall under Medscheme include Bonitas and the Government Employees Medical Scheme. Additionally, AfroCentric has a strategic alliance with Sanlam, which owns 29% of Medscheme.
Comparisons are inevitably drawn between AfroCentric and Discovery, the two largest players in medical aid administration. However, they are very different businesses, with Discovery being diversified into other financial services businesses, insurance, investment and now also banking.
CEO Antoine van Buuren highlights the key problem in the South African healthcare industry. “Affordability is a big issue. Medical inflation outstrips the CPI [consumer price index] by 5% per annum.”
Because of high subscription costs, fewer young people are joining medical aids, putting the burden on remaining members.
Membership has levelled at about 9-million people over the past three years. Contrasting with this flatline, the number of private hospital beds has increased 9% during the same period to 38,000.
The healthcare industry is at a critical crossroads. AfroCentric believes by applying several innovative interventions, costs can be significantly reduced and the industry could be restored to greater sustainability.
An obvious contributor to cost reduction would be to cut out superfluous layers in medical aid administration and streamline processes.
Another saver would be the reduction of healthcare spending on primary providers by persuading doctors and patients to consider alternative treatment, for example for musculoskeletal disorders such as back and neck pain.
Van Buuren says there is usually a 90% chance of improving such disorders without having to resort to dramatic surgery, which would notably cut down on costs.
Additionally, trends relating to waste and abuse are detected early on by the group’s Insurance Fraud Manager. “We have to clamp down on the naughty people in the industry in order to reduce costs,” says Van Buuren.
He also points out that while the Government Employees Medical Scheme account is a low-margin business, it serves a very strategic purpose as it positions AfroCentric nicely if and when a National Health Insurance (NHI) scheme is implemented comprehensively.
As the government acknowledges, it does not have the capacity to implement NHI on its own and will co-opt the private sector, especially those servicing the middle and lower ends of the market. “You can’t look at an NHI solution for SA without considering AfroCentric,” says Van Buuren.
AfroCentric also sees future growth in the rest of Africa where its revenue is small but margins are high.
Management acknowledges, however, that it needs to tread very carefully in this jurisdiction. The rest of Africa is a high-risk area plagued by volatile commodity prices and foreign exchange constraints.
The share is sitting on a high price:earnings ratio (p:e) of about 26 times because of the one-off, non-cash flow effect of large acquisition-related costs connected to the 2017 fiscal year.
The group’s share price has been in a gradual uptrend for some years now. So while spectacular gains are not necessarily expected in the short to medium term, solid and sustained growth seems likely.
“This is a rapidly consolidating industry,” says Ian Cruickshanks, economist at the Institute of Race Relations in Johannesburg. “Profit margins are paper-thin. Is this a great investment? Not sure.”