Netcare is the perfect example of operating leverage
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In a voluntary trading update for the six months to March 2022, Netcare announced that it achieved revenue growth of between 2% and 2.5%. You’ll probably agree that even the hospital food is more exciting than that.
The business was impacted by the Omicron variant in December and January. As I’ve written several times before, the pandemic was negative for hospital groups. As counterintuitive as it seems, the reason is that elective surgeries were impacted and this affected occupancy levels in the hospitals.
Despite this modest revenue growth, EBITDA margin still increased. This gives us insight into the extent of operating leverage in hospitals, as small improvements in utilisation can drive growth in profits. Occupancy in February and March averaged 62.4%. Another benefit to EBITDA margin was a drop in Covid-19 protective equipment expenditure.
Group EBITDA increased by between 8.5% and 9%, with normalised EBITDA margin improving by 100bps to 15.8%. If I understood the SENS correctly and if strategic project costs are excluded, the margin was 16.8%. At all times, I would treat normalised margins with suspicion as an investor. If strategic projects are required on a regular basis for the group to compete, then they shouldn’t be ignored by investors.
Net debt to EBITDA has improved over the past twelve months from 2x to 1.7x. The latest number is in line with the September 2021 (interim) level. In absolute terms, debt has declined from R6.1 billion to R5.4 billion in the past year. The group has cash resources and undrawn committed facilities of R3.4 billion.
I was saddened to note that March 2022 saw the highest mental health occupancy levels since the start of the pandemic. This is the true legacy of the virus and the response to it by governments around the world. We’ve really been through a lot.
Moving to segmentals, Hospitals and Emergency Services grew revenue by between 2% and 2.5% and EBITDA by between 7.7% and 8.2%. EBITDA margin of 15.5% was well up on the comparative interim period (14.7%) and FY21 at 15%.
In Primary Care (e.g. medical and dental clinics), revenue growth was between 5.2% and 5.7%. This drove a substantial increase in EBITDA of between 30% and 32%, with the effect of operating leverage clearly visible. EBITDA margin expanded from 18.4% to 23% year-on-year.
In terms of strategic projects, the 427-bed Netcare Alberton hospital opened in April and construction of the 36-bed Akeso Richards Bay facility is complete. Another project highlighted in the announcement is the CareOn electronic medical record project, with 20 hospitals on track to be completed by the end of 2022.
ESG enthusiasts will also be pleased to learn that Netcare is the only healthcare institution in the world to win Gold Medals in all four categories of environmental sustainability in the global Health Care Climate Challenge.
The share price is slightly lower this year and just 4% up in the past twelve months. It has traded in a range between R14 and R16 in the past 6 months.
