The healthier hospital group
The Health & Services Index is my least favourite sector this year – if anything, I would recommend a shif t f rom overweight to neutral simply because it’s overextended. However, with the pattern Mediclinic International is forming, it could secure medium-term upside.
As part of t he private hospital industry, which has become an integral part of South Africa’s healthcare environment, Mediclinic has f lourished over the years. With its successful international expansion its revenue is diversified, which means a weaker rand is beneficial to its revenue stream. Mediclinic now earns 50% of its profits in Switzerland, 20% in the United Arab Emirates (UAE) and the rest in South Africa and Namibia.
Mediclinic recently reported a 16% increase in revenue for the year to end March, while profit increased by 26% to R4.5bn. Seemingly, investors expected a better performance and shares were down as much as 7% in intraday trading following the release on 22 May. The group blamed the Swiss government for adjusting the national outpatient tariff, which affected its Hirslanden unit, the largest private hospital network in Switzerland.
Me d i c l i n i c h a s fallen by approximately 22% since peaking at 13 460c/share in April.
That aside, Mediclinic generally boasts a highly experienced management team that has led sustainable growth over the past two decades. It also enjoys the benefits of having Remgro, which refinanced its Swiss and South African debt during October 2012, as a major long-term shareholder.
The fact remains that no matter the economic cycle, healthcare remains in demand. Therefore, healthcare stock fundamentals will often be credible, and the trend will be more sentiment-driven.
But as mentioned before, I believe the Health & Services Index is overextended and is due for a medium-term correction – already Netcare and Life Healthcare are showing signs of distress. But Mediclinic could stil l have legs to run, thus presenting a good switching opportunity.
Mediclinic has retraced to its second support trendline, and I expect it to hold there, given its mega-oversold relative strength index (RSI). If so, Mediclinic could breach the upper slope of its falling-wedge pattern, confirmed above 11 200c/share. The upside target of this breakout would be situated at 16 290c/share.
The second support trendline would be breached below 9 645c/share, possibly permitting a sell-off towards the 9 000c/ share prior low. The next support level would be at 8 370c/share. A sell signal would be triggered below 9 645c/share.