Netcare reports its 6-monthly results

Organisation: Position: Deadline Date: Location:

Leading healthcare provider, Netcare, has continued to deliver a resilient operational performance in a rapidly changing market and economic environment. Trading during the first five months of the financial year through to the end of February 2020 remained in line with expectations and market guidance. However, following the confirmation of the first South African case of the COVID-19 pandemic, the month of March 2020 proved to be a transitionary period, in which the business was materially impacted by extensive COVID-19 preparations and the curtailment of patient volumes resulting in lower occupancies from mid-month.

Revenue from continuing operations for the six-month period improved marginally to R10,713m (2019: R10,520). EBITDA increased 1.0% to R2,127m (2019: R2,106m) at a margin of 19.9% (2019: 20.0%). Operating profit was 0.6% lower at R1,738m (2019: R1,748m).

The pandemic’s disruptive effect on March trading resulted in an approximate reduction of R143m in revenue and R64m at the EBITDA level.

A once-off, non-cash share-based payment expense of R348m was recognised in the current period arising from the implementation of Netcare’s B-BBEE transaction in October 2019. “This B-BBEE transaction,” said Netcare CEO, Dr Richard Friedland, “is reflective of our commitment to the imperative of building a transformed South Africa characterised by values of social and economic equality and inclusion for all. This has ultimately strengthened the ownership component of our empowerment rating and resulted in an improved overall B-BBEE rating.”

Netcare’s adjusted headline earnings per share (HEPS) from continuing operations declined 6.3% to 79.0c (2019: 84.3c), inclusive of the adverse trading conditions in the month of March 2020 related to COVID-19. Adding back the estimated impact of COVID-19, equating to 3.4c, adjusted HEPS amounted to 82.4c which represents a 2.3% decline against the prior period.

The sale of six UK hospital properties owned by GHG PropCo 2 was successfully concluded in late January 2020. This completes Netcare’s exit from the UK and the final winding up of the UK structure is in progress, with cash proceeds of approximately R665m expected to be repatriated before September 2020. This is in excess of the carrying value of Netcare’s 56.9% interest in GHG PropCo 2 of R226m.

The return on invested capital for the period amounted to 18.1% compared to 18.8% last year.

At 31 March 2020, group net debt (exclusive of IFRS 16 lease liabilities) was contained at R6,231m (March 2019: R6,182m). Net debt to annual normalised EBITDA remains stable at 1.5 times and remains comfortably within the internally set policy limit of less than 2.0 times. Interest cover was consistent at 7.2 times.

An additional R2.8bn of undrawn committed banking facilities and funding has been secured to date, increasing available committed undrawn facilities to R4.8bn which will bolster liquidity for the foreseeable future. Dr Friedland commented, “We remain in a healthy financial position with low levels of gearing and we are well placed to withstand possible operating losses from the uncertain environment introduced by the pandemic.”

Given the performance of the business in April and the extraordinary levels of uncertainty, Netcare has suspended its interim dividend in order to preserve cash. Other cash preservation measures include the reduced utilisation of agency staff, deferral of non-critical project expenditure, the postponement of approximately R800m of capital expenditure earmarked for new and current projects and the suspension of further share buy-backs. The approximate R665m proceeds from the GHG PropCo 2 property disposal will provide an additional level of liquidity comfort.

Corporate activity
Netcare executed the buy-back and cancellation of 12.7m of its own shares at an average price of R19.68 per share for R251m during November and December 2019.

In terms of the B-BBEE transaction mentioned above, Netcare had approved a further allocation of 61,110,000 previously unallocated Netcare shares that were available under its Health Partners For Life (HPFL) B-BBEE scheme, to 20 350 Netcare employees (excluding executives), of which 80% are black and 65% are black women. All HPFL shares are fully paid up, have no related outstanding debt and are not encumbered.

Each beneficiary has received an equal allotment of 3 000 shares and, after the ten-year waiting period, will be delivered to beneficiaries in the form of Netcare shares. The allocation was made at R13.94 per share on 15 October 2019 and beneficiaries are entitled to 20% of dividends from the date of allocation.

COVID-19 impact
Netcare’s extensive COVID-19 preparations were initiated by adopting an “abundance of caution” approach, which utilises a combination of the principles of Disaster Management and Occupational Health and Safety and is informed by the evolving policy guidelines of the National Department of Health, the National Institute of Communicable Disease and the World Health Organisation.

Friedland said, “We have committed approximately R150m to enhance the readiness of our ICU and high care facilities in the form of additional ventilators, specialised air filters and ultraviolet light disinfection robots. Additional inventory reserves have also been procured, including adequate levels of personal protective equipment, drugs and consumables.”

Netcare experienced the real impact of COVID-19 in the month of April when South Africa was under full lockdown. This dramatically impacted non-urgent surgery, medical and trauma cases, with acute hospital occupancies falling to 32.5%. As a result of the lockdown, pathology laboratories experienced a significant decrease in the percentage of positive specimens for the usual respiratory viral cases. Emergency and trauma related activity also reduced dramatically, which is borne out by a decline of up to 60% in unnatural deaths in South Africa during this period. The responsible resumption of medically necessary, time sensitive surgery commenced at the beginning of May 2020, resulting in an uplift in patient days.

Netcare St Augustine’s Hospital in Durban was temporarily closed between 2 April and 11 May 2020. This followed an outbreak of COVID-19 infections at the facility. Netcare has welcomed the release of the report of the independent investigation into the outbreak. The investigation was conducted by infectious disease specialists and researchers from the Nelson R Mandela School of Medicine at the University of KwaZulu-Natal and the KwaZulu-Natal Research Innovation and Sequencing Platform (KRISP). All recommendations and interventions outlined in the report have been fully implemented at the hospital. In many cases these interventions were already in place and have been further strengthened and enhanced as a result of the valuable recommendations made by the report.

“We continue,” added Friedland, “to learn more about the virus and we are responding to this and many other forms of new research with further, rigorous, precautionary measures. We wish to reiterate our sincere gratitude to all our healthcare workers, nurses and doctors, and their families for their incredible efforts under these trying and challenging circumstances.”

One of the consequences of COVID-19 has been an accelerated need for telemedicine which enables clinicians to continue providing care and virtual consultations to patients without exposing themselves, their patients and staff at the facilities to avoidable risks. In a post COVID-19 world, the adoption of telemedicine is likely to grow and to this end, Netcare has developed an innovative telemedicine solution. The technology employed is accessible through any modern web browser, allows for a dial-in option for patients who don’t have access to data and facilitates integration into the electronic health record systems being rolled out. The solution is currently being deployed in Medicross and will be completed by the end of May 2020, although this is only partially expected to soften the impact of lower overall general practitioner patient visits in H2 2020. The platform will be rolled out to hospital specialists in June 2020 and to Akeso and Netcare Occupational Health in July 2020.

Divisional review

Hospital and emergency services
Revenue for the segment grew by 2.5% to R10,380m. Patient days declined by 2.6%, which comprises a 3.2% decline in acute hospital patient days, offset by growth of 2.9% from Akeso Clinics.

Approximately 1.4% of the decline in acute patient days is due to lower activity in March 2020 because of COVID-19. The balance of the decline is a result of new hospital networks in the 2019 calendar year, a tightening of conditions on an existing Designated Service Provider (“DSP”) network for 2020 and ongoing pressure on respiratory admissions prior to the onset of COVID-19.

Friedland commented, “While acute patient days are lower compared to the same period last year, we experienced some recovery in activity in the second quarter before COVID-19 related impacts”.

Acute hospital full week occupancy levels ended the period at 62.3% (2019: 64.7%), with weekday occupancies of 67.5% compared to 70.5% in the prior year. Acute hospital revenue per patient day increased by 5.6%.

Netcare continues to attract specialists and a net 56 doctors were granted admission rights at the acute and mental health facilities during the period. EBITDA for this segment decreased by 1.6% to R2,076m and operating profit was marginally lower at R1,718m.

The pre-COVID-19 implementation of the CareOn pilot at Netcare Milpark Hospital remained on track and within budget, while the project implementation timetable will be extended due to delays caused by the pandemic.
In line with Netcare’s strategy of improving asset utilisation, 42 underutilised hospital beds being converted to high demand disciplines in the first half of the 2020 financial year. Of the 100 beds transferred from Rand Hospital to Netcare Milpark Hospital, 52 beds were commissioned in January 2020 following on 48 beds that were opened in mid-September 2019.

Primary care
Primary Care revenue decreased by 12.5% to R342m because of the integration of the 15 Medicross day clinics into the Hospital division with effect from 1 October 2019 as well as the rationalisation of some previously loss-making Medicross clinics. Underlying revenue growth (excluding day and rationalised clinics) amounted to 7.3%. EBITDA remained flat at R52 million and the EBITDA margin improved to 15.2%, driven by the benefits of clinic rationalisation, offset by the transfer of day clinics and prior period restructuring costs.

Trading update post March 2020
Trading during the month of April 2020 was significantly affected by the lockdown, which had a severe impact on activity levels across the business.

Acute hospital patient days for the month of April 2020 declined by 49.5% compared to April 2019, with occupancy levels at 32.6% (April 2019: 65.0%). Mental health patient days in April 2020 declined by 63.3% against the comparative period. Netcare 911 experienced a slowdown in emergency cases during the lockdown, while the impact on cancer care and renal care services was less severe. Within the Primary Care division, general practitioner patient visits declined approximately 50% from pre-COVID-19 levels, while the South African Dental Association’s prohibition on non-emergency dental work saw a decline of approximately 67% in dental visits.

Level Four of the national lockdown commenced on 1 May 2020 and has allowed our doctors to recommence with medically necessary, time sensitive surgical procedures. From the beginning of May 2020, acute hospital patient days to-date are trending 15.0% higher than April 2020.

Given the evolving understanding of the pandemic, both locally and globally, it is evident that demand for, and the provision of, healthcare services for the next six months and beyond, will change significantly. Netcare’s operational plans are informed by a Netcare-specific dynamic capacity demand forecasting model which assists in managing bed capacity on a risk-stratified basis. Margins will be impacted by changes in volume and case mix, which will be determined by the timing and peak of the pandemic, as well as the increased costs of risk mitigation measures that are essential in delivering healthcare in these circumstances. As such, Netcare has committed to Government to treat public COVID-19 patients in Netcare facilities on a not-for-profit, cost recovery basis and a process to establish pricing is underway.

In light of the high degree of uncertainty, Netcare has elected to withdraw its guidance for the remainder of FY 2020.

Issued by MNA for Netcare

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