Net­care: Wait for a re­cov­ery be­fore sell­ing

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

With a ris­ing mid­dle class and an i ncrease i n chronic dis­eases, South Africa has s e en a grow­ing de­mand for health­care ser­vices. Net­care, the coun­try’s sec­ond-largest pri­vate hos­pi­tal group based on mar­ket cap­i­tal­i­sa­tion with op­er­a­tions in SA and the UK, re­ported a 16% in­crease in profit af­ter tax to R1.1bn for the six months to end March. The pe­riod was characterised by a strong per­for­mance from its South African op­er­a­tions, and a f ur­ther im­prove­ment by its sub­sidiary BMI Health­care in the UK, it said.

Net­care in­vestors have en­joyed ro­bust years of per­sis­tent up­side, with the share price jump­ing 64% over the past 12 months alone. A con­tin­u­ous trend of good re­sults has kept a steady up­ward

4 500

4 000

3 500

3 000 mo­men­tum, with the trend steep­en­ing from March 2014 – ef­fec­tively form­ing the f inal phase of a ma­jor bull trend. Be­cause the group’s rev­enue is split al­most 50/50 be­tween SA and the UK, a weaker rand is ben­e­fi­cial to the com­pany.

Not even the heated de­bate re­gard­ing pri­vate hos­pi­tal costs, or gov­ern­ment’s pro­pos­als, such as the Na­tional Health In­sur­ance ( NHI), swayed in­vestors. Net­care is gen­er­ally con­sid­ered as a de­fen­sive stock be­cause health­care ser­vices are in de­mand re­gard­less of the eco­nomic cy­cle, even dur­ing times of re­ces­sion.

As its lat­est in­terim re­sults show, the group’s growth story con­tin­ues. But the re­cent dip in share prices over the last month in­di­cates an ex­hausted trend to me. Un­der­stand­ably so – Net­care

4 500

4 000

3 500

3 000 is trad­ing on the third and fi­nal phase of its pri­mary bull trend, and usu­ally a cor­rec­tion is im­mi­nent in that case, ir­re­spec­tive of any pos­i­tive news f low.

Net­care could be top­ping out. It has pulled back within the third phase and is tee­ter­ing on its sup­port trend­line. It may hold there, given the over­sold rel­a­tive strength in­dex (RSI). But a re­ver­sal be­low 4 440c/share would mean that there are fewer buy­ers, and the third sup­port trend­line may well be breached. I’m cau­tious on Net­care, and sug­gest in­vestors pre­pare to re­duce longs if Net­care reaches a ceil­ing at 4 440c/share. I would rec­om­mend a short be­low 3 550c/share as down­side to the 2 960c/share sup­port level could then en­sue.

POS­SI­BLE SCE­NARIO:

Up­side above 4 440c/share would ex­tend the third phase to new highs, and be­cause Net­care would be trad­ing in the f inal phase, up­side may be rapid. How­ever, a ma­jor pull­back would still be loom­ing, in which case I would sug­gest sell­ing grad­u­ally on ev­ery uptick to max­imise prof­its.

AL­TER­NA­TIVE SCE­NARIO:

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