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