Mediclinic 6M - Hurt by regulation change in Switzerland

On Thursday morning Mediclinic released less than impressive numbers. As a group, their revenue dropped 1%, and earnings per share declined 9%. In the recent past, their issues were related to the Middle East division, this time it is their Swiss division which disappointed.

Their Swiss division, Hirslanden, was negatively impacted by changes in government regulation of heath care pay outs by private insurers. The new coverage rules have caused patients who would previously have stayed a night in hospital (inpatients) to shift to checking out sooner (outpatients). Having fewer patients spend the night, means the hospital makes less money.

Out of all their operating regions, I was surprised that Switzerland was the one to fall foul of stricter regulations. Most government policies have good intentions but can have unintended consequences. These new regulations have been in place for less than a year and have resulted in Mediclinic spending 7% less on expansion and 31% less on maintenance. I wonder what the long-term impact will be on the medical industry in general.

Due to Hirslanden being their biggest division, those woes outweighed the improvements from both South Africa and the Middle East. In their local currencies, both divisions reported a growth in revenues and more importantly a growth in margins. Good to see.

Mediclinic's final operating region is the UK, where they have a 30% stake in Spire Healthcare Group. Spire is a listed company, which resutls in Mediclinic updating the holding value of their investment as the share price changes. Over the last 2-years, the share price has gone from GBP 4.00 a share, to GBP 1.25. It is astonishing how many South African companies have burned their fingers with investments in the UK.

It will be another 18-months until we see comparable results out of Switzerland which reflect the trend under these new insurance rules. The value of the UK investment will probably stay subdued until we have some certainty around Brexit. After some tough periods, the South African and Middle East regions looked poised for solid growth. All in all, two out of the four regions are struggling, so we don't expect fireworks from the share price in the near term.