News and views:
sectors and shares

Private hospitals: mixed fortunes

The South African private hospital sector delivered a mixed set of results in a challenging operating environment, where medical schemes retain the upper hand in an oversupplied market.

Netcare, which we hold in some client portfolios, was the standout performer. Revenue growth of 5% translated into a 22% increase in earnings per share, reflecting the strongest operating leverage in the sector. Management’s early investment in electronic health records continues to exceed expectations, while the repurchase of 14% of shares over the past two and a half years reflects its view that buying back underutilised hospital capacity offers better returns than building new facilities.

Mediclinic Southern Africa delivered the strongest growth in patient days, most likely supported by the density of its Western Cape network and ongoing semigration trends. Earnings rose 16% year on year on revenue growth of 6%. Following the recently announced restructuring, Mediclinic will remain a significant contributor to Remgro, which we also own in some client portfolios, accounting for roughly 25-30% of earnings.

Life Healthcare was the relative laggard. Revenue growth of just 2% translated into earnings growth of 8%, while a slight decline in patient days suggests some market share pressure in its core acute hospital business. The group continues to focus on expanding complementary services such as radiology, renal dialysis and mental health, alongside selective greenfield hospital developments.

Pepkor: growing wallet share

Pepkor’s results again showed the defensiveness of the business and the benefit of using its scale across retail, financial services and Flash. The group has several initiatives under way that should add profitable growth over time. Its low dividend payout ratio and cash-generative core business also give management room to keep reinvesting, both organically and through acquisitions.

Pepkor is seeking to capture a greater share of the customer wallet, with financial services central to this strategy. The group already offers retail credit, Capfin unsecured lending, insurance and FoneYam’s cell phone rental product, and now wants to add banking to complete the ecosystem. With ~3 700 PEP and Ackermans stores, supplemented by Flash’s network of ~170 000 traders, Pepkor already has significant reach, customer engagement and transactional activity within its target market – far exceeding Capitec’s ~880 branches.

The banking initiative naturally builds on Pepkor’s existing customer relationships, rather than taking the group into a completely unrelated market. The question is whether it can become customers’ primary banking relationship, rather than simply offering a secondary transactional account.

Dis-Chem: the cure is in the execution

Dis-Chem’s results reinforced two views. First, the business remains focused on investment-led top-line growth. Front-shop selling price inflation was just ~1%, reflecting the discounting behind Better Rewards, while dispensary inflation was closer to ~8%. Second, Better Rewards highlighted the low switching costs in pharmacy retail. In a constrained consumer environment, customers chase value. It also showed how bringing X, bigly labs in-house is helping Dis-Chem build capabilities in data-led pricing and supplier-funded promotions to defend and grow market share.

The upside is whether the investment in X, bigly can translate into margin. As Dis-Chem becomes more corporatised, there should be scope to improve daily operations through better data, automation, and redesigned store and dispensary workflows. This should support improved pharmacist productivity, supplier-funded margin optimisation and other income opportunities.

The concern is that these capabilities are employee-intensive, which sits uneasily alongside management’s focus on cost discipline. If execution disappoints, Dis-Chem risks carrying a higher cost base without generating sufficient profit from these initiatives. In our view, the next phase of the investment case depends on delivery.

Pick n Pay: early traction, long road ahead

Pick n Pay is showing early signs of operational traction, but the recovery remains uneven. Company-owned supermarkets delivered like-for-like sales growth of 3.9%, compared to just 0.9% for franchise stores, suggesting better execution in the part of the estate where management has direct control.

Gross margin improved on the back of better category management and lower waste in fresh, indicating that the store-level reset is gaining traction. However, the cost base remains too high for the current level of sales. Even after closing or converting loss-making stores, like-for-like costs increased 6.7%, ahead of sales growth, making the labour model and the outcome of ongoing union consultations critical to the recovery.

The 12.5% sell-down in Boxer, which raised R4.7 billion, provides additional financial flexibility. However, if the Pick n Pay segment continues to consume cash, further Boxer sell-downs may be required. Breakeven has now been pushed out again, from the 2028 to the 2029 financial year, and in our view, the turnaround is likely to take longer at the current pace.

Richemont: cash-backed performance

Richemont’s 2025 financial year result was somewhat mixed in quality, but there was enough in the release for the market to remain constructive. Full-year sales reached €22.4 billion, up 11% at constant currency, with strong momentum continuing into the fourth quarter. Jewellery remained the clear growth engine, up 14% constant, with Cartier, Van Cleef & Arpels and Buccellati continuing to demonstrate strong demand and pricing power.

Margins, however, were the swing factor. Gross margin declined 250bps to 64.4%, while operating margin fell 90bps to 20.0%, reflecting pressure from gold costs, foreign exchange and tariffs. Pricing helped, but was insufficient to fully offset input inflation. Operating profit growth was markedly better in constant currency terms (+23%) than on a reported basis (+1%), highlighting the extent of the foreign exchange headwind.

Below the line, the earnings outcome was softer than expected, with continuing headline earnings per share down 8%. Cash generation, however, remained strong, with net cash increasing to €8.5 billion, supporting a 10% increase in the ordinary dividend and a 1 Swiss franc special dividend. Overall, revenue and cash were strong – margins remain the key debate.

BAT: guidance remains intact

The trading update of British American Tobacco (BAT) was steady and broadly supports the view that the year remains on track. Guidance was unchanged, with management still expecting 3-5% revenue growth and 4-6% profit growth for the financial year. More encouraging was the upgrade of growth guidance for new categories to the mid-teens, led by Velo and Vapour, highlighting progress in the higher-growth nicotine pools that will ultimately shape the quality of the business.

The US remains the key earnings driver. Management pointed to strong revenue and profit delivery across both combustibles and new categories, with a clear first-half weighting. Outside the US, the picture is more mixed. The Americas and Europe remain resilient, with a stronger second half expected, while Asia Pacific, the Middle East and Africa appear to be stabilising, with sequential improvement anticipated through the year.

Traditional combustibles continue to underpin earnings, with pricing offsetting modest share losses. The weak spot remains glo, where revenue is declining amid inventory issues and a tougher competitive backdrop. Overall, BAT is stabilising the base business, backing higher-growth categories and supporting shareholder returns, but it remains heavily reliant on the US and is tracking closer to the lower end of its long-term guidance.

Tiger Brands: better than the headline

Tiger Brands’ interim results were better than they first appeared. Reported earnings per share fell 35%, distorted by disposal gains and Carozzi-related noise in the base period. Stripping these out, underlying headline earnings per share rose 24%, broadly in line with growth in earnings before interest and tax (EBIT) of 23%, pointing to a business executing materially better than the headline numbers suggest.

Top-line growth was only 1%, but the mix was encouraging. Prices were down 2%, while volumes grew around 3%, or closer to 4.5% on a normalised basis. This suggests Tiger is improving affordability, gaining market share and driving better factory utilisation simultaneously. Together with lower commodity costs and ongoing manufacturing and logistics efficiencies, this lifted gross margin from 30% to 32%.

Operational delivery was solid across most of the portfolio. Grains was a standout, while Snacks, Treats & Beverages and Culinary all delivered strong EBIT growth. Home and Personal Care remained the weak spot, although this had been flagged previously. Capital allocation was also supportive, with the interim dividend up 3.6% and around 2% of shares repurchased. Overall, this was a strong operational result beneath a messy earnings print.

SAP: the power of switching costs

SAP is the global leader in enterprise resource planning (ERP) software. Its systems sit at the centre of finance, procurement, supply chains and human resources for many of the world's largest companies. Replacing them is complex, costly and highly disruptive, creating significant switching costs and a deeply entrenched competitive position.

Recent investor concerns have focused on whether artificial intelligence (AI) could weaken the value of traditional enterprise software. Following SAP’s Sapphire conference in May, we believe these concerns are misplaced. Management provided greater clarity around its AI strategy, highlighting how it will be embedded across its applications while enabling customers to build AI-powered workflows on top of SAP’s data and systems.

A key growth driver remains the migration of customers to S/4HANA, SAP’s next-generation cloud-based enterprise resource planning platform. Momentum remains strong, and management reiterated its financial outlook while highlighting opportunities to improve growth, margins and productivity through increased AI adoption.

While competition in AI will be intense, we believe SAP’s ownership of critical business workflows and trusted systems of record gives it a strong right to win. We continue to view it as a high-quality business with durable competitive advantages and a long runway for growth.

AB InBev: fundamentals keep improving

Anheuser-Busch InBev (ABI) is the world’s largest brewer, with leading positions in many of the world’s largest beer markets and a portfolio of global brands including Budweiser, Corona and Stella Artois. Its scale provides significant advantages in distribution, procurement, marketing and brand investment.

We met with management during May and came away encouraged by their confidence in both the long-term attractiveness of the category and ABI’s positioning within it. While developed markets remain relatively low-growth, management highlighted several structural growth drivers, including rising incomes in emerging markets, premiumisation, digital monetisation opportunities and expansion into adjacent beverage categories.

The company’s first-quarter results demonstrated continued operational momentum. Revenue increased 5.8%, earnings before interest, tax, depreciation and amortisation (EBITDA) grew 5.3% and underlying earnings per share rose 20.8%. ABI also gained or maintained market share in 75% of its markets globally, while delivering record first-quarter volumes in several key markets, including Mexico, Brazil, Colombia, South Africa and Peru.

Despite the shares rising more than 20% year to date in US dollar terms, investor sentiment remains cautious. We believe this overlooks meaningful improvements in the business. ABI continues to generate substantial free cash flow, leverage has fallen materially and management has greater flexibility to return capital through dividends and share buybacks. At ~18 times forward earnings, the shares remain attractively valued relative to the quality of the business and its long-term earnings potential.