Mediclinic half year numbers - not going so well in UAE

Mediclinic reported numbers for their half year to end September. "Things" are taking a little longer with regards to integrating the Al Noor reverse listing. Not the listing itself, that has gone OK, rather the AL Noor operations into the existing Middle East businesses that Mediclinic had before they became a London listed business earlier this year. Excluding the Al Noor business, revenues grew by 11 percent, including, it was up 27 percent to 1.283 billion Pounds. Operating profits increased 10 percent. The big change in these results is that the weighted number of shares in issue grew to 737 million from 545 million. Earnings per share decreased 26 percent to 12.8 pence for the half. The dividend was hiked by 20 percent to 3.2 pence.

The breakdown of revenues are as follows: Hirslanden (Switzerland) contributes 47.7 percent, Southern Africans responsible for 28.3 percent and the bigger and newest business, the Middle East accounts for 23.8 percent of group revenue. Of course there is still the just shy of 30 percent stake in the UK listed hospitals business, Spire. In terms of underlying EBIDTA contributions, Switzerland stands head and shoulders above them all, as you would imagine, being a 51.8 percent contributor and saw good growth (currency translations - yes) of 18 percent. The South African business contributed 34 percent to EBIDTA and the Middle East business was the balance, 15.45 percent.

The Middle East operations were the problem in these numbers, it wasn't "unknown", the trading update was pretty clear that there were issues. The Middle Eastern countries reliant on oil exports for revenues have seen giant holes in budgets. This has impacted many businesses in the region. The Health Authorities in Abu Dhabi announced in June (effective 1 July) that Emiratis and expats using the Thiqa plan would now be responsible for co-payment of 80 percent at private institutions. At public institutions, 100 percent still.

Thiqa in Arabic means trust, the scheme itself is relatively new (established by the Crown Prince of Abu Dhabi in 2007), and offers health insurance for all the Emiratis and "those of similar status", I presume that means expats with high skills and long dated work permits. Daman, which is the The National Health Insurance Company, manages this on behalf of the Abu Dhabi government. There are around 1.4 million Emiratis in the UAE, the rest of the significant population (around 6 million in the UAE) is made up of expat workers.

So, the funding of the services is under scrutiny, the recent budget saw a cut of just over one percent in that region, the UAE. The government depends on half of their revenue collection on oil exports, with the prices having been very volatile, the good times are over for the time being. Sovereign Wealth funds often plug the gaps during periods of stress, like this, and infrastructure plans no doubt will be curtailed. So there are general stresses in the area in terms of the ability to a) afford private healthcare and b) fund the 20 percent co-payment out of your own pocket. So you can see why this has impacted on the business of Mediclinic. Added to the rise in co-payments, there have been Doctor vacancies and integration issues, as well as delayed opening of various facilities. All around, more than a few problems in the Middle East.

Not only has it been tough going in the Middle East, here in Southern Africa underlying earnings decreased by 5 percent. Financing costs increased. The group still plans to invest heavily in their network, 285 million Pounds in the coming financial year, most of which (44 percent) will be in Switzerland. 29 percent here in Southern Africa and then the balance, 27 percent in the Middle East. So the company will continue to forge ahead in a tough operating environment. With regards to the share price, the double whammy of the weak environment has been exacerbated by a weak Pound. In part that means earnings from their foreign operations should be higher, it does mean that in their secondary listing (here in Johannesburg), the share price has weighed heavy.

We like the theme a lot, and whilst growth seems to have disappeared for the time being, this is a great opportunity to acquire the same business at a much cheaper price. We are long term very confident that they will work through the issues that they will face both at a regulatory level (everywhere for healthcare) and with regards to offering the same quality care on a relative basis. If you think that private healthcare is facing headwinds as a result of consumers being under pressure, can you imagine what governments are facing?

Healthcare and in particular hospital stays are very emotive issues, when you throw in cost, it becomes a bigger issue. Cost. And people do not skimp there. We maintain our buy recommendation, the stock is trading at a 52 week low and thus far we have been very wrong, the business is superb and the big shareholder (Remgro) may well be in a position to further the expansion, if the right acquisition arises. I suspect there won't be any of that for a while, they will continue to integrate the Middle East business and watch the regulatory changes both here in South Africa, and Switzerland.