Careful how you tax — it could backfire

Netcare, SA’s third-largest private hospital operator by market value, says a more severe second wave of Covid-19 weighed on its first-half core profit as patients stayed away and deferred non-urgent surgeries.

SA hospital groups remain cautious as numerous countries battle with a third wave of Covid-19, while locally the pace of the vaccine rollout and the efficacy of vaccines against new variants are also in question.

Revenue is expected to fall by at least 5.5% in the six months to end-March from the prior year, Netcare said in a trading update on Thursday, as SA grappled with a spike in infections that prompted more hospital admissions than during the first wave.

Earnings before interest, taxation, depreciation and amortisation (ebitda), a measure of operating profit, are expected to fall at least 36%, Netcare said, adding it had incurred about R300m in pandemicrelated costs.

In the group’s first half of its 2020 year, it had reported revenue from continuing operations of R10.7bn, normalised ebitda of R2.12bn, and was largely free of Covid-19.

The group, however, said its experience from the first wave and more effective treatment enabled a more “nuanced approach” to the second wave, easing pressure on bed demand and reducing lengths of stay.

Revenue compared with the six months ending September 2020 is expected to improve as much as 24.5% and ebitda as much as 672%, the group said. This surge comes off a low base, with Netcare making a loss of about R40m in the second half of its 2020 year in terms of normalised ebitda.

Netcare, valued at R21.2bn on the JSE, also managed to cut net debt 4.6% to R6.1bn in the course of its first half, and had cash and undrawn facilities of R6.6bn available at the end of March.

The trading update confirms that the SA hospital groups might have reached a bottom from a revenue and margin perspective, said Gryphon Asset Management portfolio manager Casparus Treurnicht, adding that considerable risks remain from the pandemic.

Sectoral changes from National Health Insurance (NHI), and SA’s generally poor economic outlook remained a headwind for hospital groups, he said, especially Netcare with its extensive SA weighting. However, a stronger rand was benefiting the group relative to its peers, given its effects on their international earnings, Treurnicht said.

Netcare s operations are in SA and Lesotho, while Mediclinic only generates about 30% of group revenue in Southern Africa, and Life Healthcare 68%.

Netcare’s shares were up 1.18% to R14.61.

Netcare has seen its share recover 18% so far in 2021. Over the same period, Mediclinic and Life Healthcare have risen about 6% and 12%, respectively.

Zaid Paruk, portfolio manager at Aeon Asset Management, said Netcare’s first-half results are encouraging, while the group is also in a strong financial position, which will help it weather a tough climate.

“Analysts will be monitoring occupancy levels as a key measure of sustainability due to some of the pent-up demand being cleared in the period,” he said.

Netcare said it treated its first Covid-19 patient on March 9 2020 and has since treated more than 71,000 patients, of whom about 31,000 were admitted to its hospitals. Of those, about 26% were treated in high care or intensive care.

Netcare’s activity levels and occupancies have not recovered to pre-pandemic levels, Netcare said, with paid patient days in the first half down 13.6% year on year. Room rentals from doctors normalised in the six months to end-March, but parking revenue and revenue-based rentals from pharmacies and coffee shops have remained under pressure.

There was a steady improvement in average, acute hospital occupancy levels during the six months to end-March. This was characterised by growth in elective surgery during October and November, with increased Covid-19 cases in December 2020, which is traditionally a less active month.

February saw the reimplementation of lockdown level 3 and the closure of schools through to the middle of the month, which tempered the incidence of Covid-19 cases, and admissions.

Netcare said tightening of lockdown measures over Easter successfully curbed the incidence of Covid-19 cases reported over the past two weeks, but the operating environment remains uncertain.

“A return to normal levels of elective surgery and medical admissions will continue to be influenced by the trajectory of the pandemic, and more specifically the risks and timing of any possible third wave, the timing and efficiency of an uninterrupted vaccine rollout in SA, the efficacy of current vaccines against new variants of Covid19, and the tightening or easing of lockdown levels,” Netcare said.

THE TRADING UPDATE CONFIRMS THAT THE SA HOSPITAL GROUPS MIGHT HAVE REACHED A BOTTOM FROM A REVENUE AND MARGIN PERSPECTIVE