Mediclinic's disappointing trading statement

Yesterday Mediclinic released a trading statement which left the market very disappointed. It felt a lot like Aspen in fact. The market was expecting so much more and it took no prisoners. Not many bear markets do.

Let's look at the update. In constant currencies revenues were up 2%, adjusted EBITDA was down 4% and EPS is expected to come in at 10 pence compared to 11.3 pence last year.

Which region let the team down? Switzerland was particularly disappointing.

The Swiss healthcare system is complicated (which system isn't?). I actually met a Swiss person a few weeks back and she explained how it all works to me. I also double checked this on Wikipedia. Citizens are forced to take on private insurance to fund private healthcare. There is no state provided healthcare. If a citizen gets treatment, there is often still excess that needs to be paid. This excess can also be insured, for a higher monthly premium of course. The insurance companies are not allowed to make a profit on this insurance but can do so on supplemental plans.

The patient can then decide which facility to go to, knowing that the more high-end facilities are more expensive which means a higher excess. By the way, the Swiss lady told me that Hirslanden (Mediclinic) is world class.

In 2004 the government introduced TarMed. This is a tariff system which sets the prices for certain procedures. It also forces certain procedures to be considered outpatient. This means that the patient does not sleep the night which is bad for hospital margins. This was implemented to take the pressure off the hefty insurance premiums which is a political hot topic at the moment, as the citizens think it is too high.

The problem here is that medical inflation is the highest in the world. Although innovation is rife, it comes at a very high cost. So when your prices are fixed but your costs are increasing, margins get crimped. Management's margin guidance was 17.3%. The trading updated is expecting 16%. This was the big miss that disappointed the market.

Having said that, Switzerland is still a global beacon for private healthcare. Most internationals come during the winter months for operations, which will be included in the second half numbers. SA and The Middle East are showing some green shoots. We expect the numbers to be better in the next 6-months. The quality will also shine through as citizens and internationals will pay the excesses for world-class healthcare.

We still feel that Mediclinic offers a great product in a sector where demand is constantly growing. It hasn't been easy out there but we should remain patient. Just like their biggest shareholder, Remgro.