South African companies seeking overseas expansion have in general not covered themselves in glory with their forays into foreign markets. Hospital groups in particular have struggled and Netcare is no exception. After its own ‘Nexit’ from the UK in 2018, the company is now a pure play in the local healthcare industry. Despite its offshore misadventures, Netcare has shown that its SA business can generate shareholder value over time. With a strong balance sheet and good cash generation, the company pays a healthy dividend, and the valuation is attractive. We’ve therefore recently included the share in our portfolios.
South African hospital groups chasing overseas markets in pursuit of growth have in general not met with much success – think of Mediclinic with Hirslanden in Switzerland and Al-Noor in the UAE, and Life Healthcare with Max in India and Scanmed in Poland. In 2006, Netcare paid roughly R2.3 billion in equity for its investment in BMI Healthcare in the UK. The company achieved negative earnings of around R600 million on a cumulative basis, and exited the business for next to nothing in 2018. Had the money simply been invested in the market, it would have yielded roughly R11 billion today, more than a third of the company’s current market capitalisation of R29 billion.
After its ‘Nexit’ from BMI Healthcare in March 2018, Netcare is now a pure play in South African healthcare. Despite its UK misfortunes, the company has actually been a decent return-on-capital business, comfortably outperforming its cost of capital over the past 20 years for its South African division. It’s therefore a business that has shown it can, on its own, generate shareholder value over time.
Netcare’s management focus is currently on running these assets better, and investing in electronic health records (to increase patient experience and make life easier for healthcare professionals) and non-acute care (most notably mental health and cancer care). Shareholder returns have been prioritised, with capital allocation focusing on:
Normal dividends (around 65% of earnings paid out)
Re-investing in the business (20% hurdle rate for new investments)
Buy-backs or special dividends if more cash remains.
Over the past two years, the company has returned R2.79 per share in the form of dividends or buy-backs – around 14% of current market capitalisation. We believe that with current capital requirements, there’s room for more excess payments to shareholders.
SA HEALTHCARE MARKET
The healthcare market in South Africa remains challenging. With negligible employment growth, the total population with medical insurance has remained broadly constant over the past five years at 8.9 million lives. The supply side, on the other hand, has seen growth of 3-4% per annum over the past five years, led by independent hospital groups.
The mismatch has led to occupancy rates coming under pressure. It has also increased the bargaining power of medical schemes, which have exercised this power in the form of network options (a reduced tariff in exchange for being included on a scheme’s hospital list). Around 30% of Netcare’s revenue is currently linked to some kind of network option, and this figure is expected to grow.
Our base case is that the market will continue to be tough over the near term, and we don’t forecast a meaningful recovery in occupancy rates. The important point is that even with existing occupancy rates and pressure on tariffs, the investment case makes sense. A recovery in economic growth will be an added bonus.
WHAT ABOUT NHI?
A looming current investor concern is the National Health Insurance (NHI) Bill, which has been proposed for full implementation in 2026. What impact will this have on hospitals? On the one hand, it’ll increase the number of patients being admitted to private hospitals. In a 2017 study, Econex estimated that an additional 7.7 million public patients can be accommodated in the private sector simply by making better use of existing facilities. The flip side is that the additional patients will most likely pay reduced tariffs. Our own view is that the final impact on hospital financials when NHI is fully implemented will probably be net-negative.
We don’t, however, view 2026 as a feasible deadline for full implementation. In our view, NHI will be introduced in a phased manner, but the road is in all likelihood still a long one. We therefore don’t believe NHI poses an immediate threat to our investment case for Netcare.
Netcare provides a pure defensive play in the South African market – in which we’re significantly underweight in our portfolios. Despite all the negative news on the local economy, we believe this has been sufficiently discounted in the current Netcare share price at a price-to-earnings (P/E) ratio of below 12 times and a 6% dividend yield. Despite pressure on tariffs, Netcare will remain a decent inflation pass-through business with strong cash flows. Due to the defensive nature of the business (relatively stable earnings) and the current low valuation, we view the downside risk of the investment to be limited.
We can assist you with
Discretionary investment management
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
Outsourced investment service
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.