Signs of a re­cov­ery

The past three years have not been kind to health­care stocks, but Life Health­care might be mak­ing a move up­ward.

Finweek English Edition - - MARKETPLACE KILLER TRADE - Editorial@fin­ Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the re­search team in t

on­cea­mong the most favoured de­fen­sive stocks on the JSE, health­care shares have been un­der pres­sure over the past 12 months. The three ma­jor providers – Medi­clinic (down 24.3%), Net­care (-22.1%) and Life Health­care (-19.6%) – have sig­nif­i­cantly un­der­per­formed the FTSE/JSE All Share In­dex (up 8%) over the pe­riod.

A num­ber of fac­tors have driven the cur­rent lack of in­vestor con­fi­dence, in­clud­ing reg­u­la­tory un­cer­tainty about a Na­tional Health In­sur­ance in South Africa, as well as af­ford­abil­ity con­cerns as con­sumers’ dis­pos­able in­come re­mains un­der pres­sure, halt­ing growth in med­i­cal aid mem­ber­ships.

Life Health­care, which op­er­ates pri­vate hos­pi­tals and of­fers other health­care ser­vices in SA, said in a trad­ing state­ment on 3 May that it ex­pects head­line earn­ings per share for the six months to end March to de­cline by be­tween 70% and 75% year-on-year.

The de­cline is mainly at­trib­uted to the im­pact of the ac­qui­si­tion of Al­liance Med­i­cal, a UK-based di­ag­nos­tics spe­cial­ist Life ac­quired in Novem­ber, prompt­ing a rights is­sue; and one-off in­vest­ments re­lated to its in­vest­ment in Poland, the com­pany said. It is ex­pected to im­pair its op­er­a­tions in Poland by up to R150m as a re­sult of an ad­di­tional re­duc­tion in tariffs in cardiology from 1 Jan­uary, it said.

Life Health­care said it also saw “lower trad­ing” in its South­ern African op­er­a­tions, and was also im­pacted by the loss of the Gaut­eng Men­tal Health con­tract in July 2016. The lat­ter saw pa­tients trans­ferred from Life Esidi­meni to un­li­censed non­govern­men­tal or­gan­i­sa­tions in or­der to save costs, with more than 90 pa­tients dy­ing of cold and hunger, de­hy­dra­tion and gen­eral lack of care, an in­ves­ti­ga­tion into the tragedy found.

Be­cause of the limited op­por­tu­ni­ties lo­cally, health­care com­pa­nies are look­ing off­shore for ex­pan­sion and growth. Over the past few years, Life has ex­panded into men­tal health, acute phys­i­cal re­ha­bil­i­ta­tion, re­nal dial­y­sis and on­col­ogy. Ac­quir­ing Al­liance Med­i­cal Group is a way for Life to en­joy em­bed­ded part­ner­ships with the Na­tional Health Ser­vice in Eng­land. Al­liance Med­i­cal also owns the largest port­fo­lio of outof-hos­pi­tal clin­ics in Italy.

Tech­ni­cal anal­y­sis:

Life Health­care is re­gain­ing up­side within its ma­jor bear chan­nel. With the three-month rel­a­tive strength in­dex (RSI) tick­ing up­wards, even form­ing a higher bot­tom, buy­ing mo­men­tum is gain­ing trac­tion. Ef­fec­tively, Life Health­care would have to trade above 3 770c/share to es­cape long-term bear­ish­ness and en­ter long-term bullish­ness.

But with tech­ni­cal signs show­ing a glim­mer of hope, it’s time to take War­ren Buf­fett’s ad­vice on in­vest­ment to heart: “Be fear­ful when oth­ers are greedy, and be greedy when oth­ers are fear­ful.”

Over the past three years health­care stocks around the world have taken a beat­ing, and with Life Health­care bounc­ing on the lower slope, nib­bling into the share within its bear chan­nel may be a prof­itable idea. Go long: A neutral long could be ini­ti­ated above 3 010c/share. Gains to 3 430c/share could fol­low. Re­vise po­si­tions once the up­per slope of the chan­nel is tested, as Life Health­care may strug­gle to over­come that slope. If not, stay long on con­tin­ued up­side. A pos­i­tive break­out would be con­firmed above 3 770c/ share (in­crease long po­si­tions ag­gres­sively). In this in­stance, a 100% re­trace­ment to 4 450c/ share could be com­pleted. Go short: Stay short be­low 3 010c/share or go short be­low 2 745c/share as the cur­rent steeper bear trend, formed within the larger bear chan­nel, could per­sist to the lower slope. A move through that slope would deepen losses to­wards 2 000c/share.

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