Both shield and sword
Private health-care provider Netcare not only has the largest share of the local market but has a significant presence in the UK as well, where it is one of the largest providers to the National Health Service.
Under CE Richard Friedland, Netcare has become one of the top health-care groups for deals in SA and abroad. It ranks alongside Mediclinic (see Financial Mail July 2-8).
Like its peers, which also include Life Healthcare, Netcare is a defensive stock, tending to preserve capital and do well when economic conditions are tight. But now it is being punted as a growth stock. A report from Sasfin Securities ranks it a buy.
Part of Sasfin’s reasoning is that Netcare currently looks to be the cheapest local hospital group. “Netcare is trading on a 12-month forward p:e of 17,3 times, which is lower than its three-year average of 20,2 times. The forward dividend yield is 2,9%,” says Sasfin portfolio manager Melanie da Costa.
“The recent pullback in the Netcare share price has presented a great opportunity to buy a stake in a world-class group, as well as a rand hedge stock,” she says.
Recently released financial results for the interim period to December showed 19,6% growth in adjusted diluted EPS. Da Costa says EPS are expected to grow 150 145 23% in the next 12 months and by 15% a year in the following three years.
In SA Netcare has a large presence, owning and operating 55 hospitals, 48 retail pharmacies and 66 Medicross medical and dental centres. It is also involved in national renal care and has 58 clinics.
Its physical presence in the UK is similar. Operating under the name General Healthcare Group, it has 61 private hospitals and 54 inhouse pharmacies.
The UK operations benefit from patient crossreferrals, with SA patients often happier going to a hospital or clinic they know has a base in SA.
Investors could be concerned about the current investigation by the competition commission into the local private health-care market. But Abdul Davids, head of research at Kagiso Asset Management, says the inquiry has been going on for some time and should not affect the investment rating of health-care stocks.
Perhaps a bigger threat to the companies is government, which wants not only to monitor what they do but also to make them conform to what government thinks they should be doing.
“Investors should be aware that at all times there is a regulatory risk in the health-care sector,” says Reuben Beelders, portfolio manager at Gryphon Asset Management.
The sector has often been favoured by investors at higher share ratings than now. Hospitals are something investors can easily understand.
On current low ratings it’s hard to disagree that Netcare is a buy. Yet investors might be happier to see it resume its defensive role rather than being a momentum stock.