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Netcare's fine the correct remedy

Nov 29 2010 15:52 Shaun Harris

Company Data

ASPEN PHARMACARE HOLDINGS LIMITED [JSE:APN]

Last traded 0
Change 11,99
% Change 0
Cumulative volume 713492
Market cap 177.97bn

Last Updated: 17-12-2014 at 04:31. Prices are delayed by 15 minutes. Source: McGregor BFA

NETCARE LIMITED [JSE:NTC]

Last traded 0
Change 0,46
% Change 0
Cumulative volume 3608229
Market cap 54.15bn

Last Updated: 17-12-2014 at 04:31. Prices are delayed by 15 minutes. Source: McGregor BFA

ADCOCK INGRAM HOLDINGS LIMITED [JSE:AIP]

Last traded 0
Change -0,08
% Change 0
Cumulative volume 72923
Market cap 8.35bn

Last Updated: 17-12-2014 at 04:31. Prices are delayed by 15 minutes. Source: McGregor BFA

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WHAT's more surprising: that after pleading guilty to charges that basically boiled down to performing illegal kidney transplants, Netcare [JSE:NTC] – the largest private hospital group in both South Africa and Britain – was only fined a nominal R7.8m, or that despite the share price getting plastered on the first two days after its “guilty” plea, the market and apparently many significant shareholders have shrugged the whole thing off?

A week after Netcare handed over a cheque in court, its share price was up 2%.

Though there have been howls of outrage in many quarters, anyone thinking Netcare would be “punished” through a substantial loss in its market capitalisation seems to be wrong.

But it might not yet be over: there are still potential lobby groups in Britain, where Netcare does major business with its National Health Services (NHS).

But it does look like the worst is over and Netcare has handled the issue well. Pleading guilty was better than an ongoing court case and the bad publicity this would have generated.

Does that make Netcare the ultimate defensive stock and underline the healthcare providers’ sector on the JSE as the home of defensive stock picks?

Perhaps it does, though it can also be argued private hospital groups are always susceptible to threatened government interference, as has been seen in the past.

This aside, private hospitals provide solid earnings growth prospects and internationally diversified operations.

On the day Netcare pleaded guilty, Medi-Clinic Corporation [JSE:MDC] chairperson Dr Edwin Hertzog – asked if he thought the drama would spill over to other private hospital groups’ share prices – was quite firm: he believed it would not.

Seems he was absolutely right, though the irony is that while all the private hospital groups’ share prices have advanced since the guilty plea, Netcare is up by the most.

Hertzog, by quickly dismissing anything like that had happened at Medi-Clinic, also seemed to make his distaste clear. But now it all seems rather academic.

Last Monday Netcare reported sterling full-year results, with basic headline earnings per share up 26.2%.

And perhaps CEO Richard Friedland is right saying – while still apologetic and conceding Netcare’s reputation had been affected – it’s a “legacy issue”.

He says the illegal transplants took place seven to nine years ago, wouldn’t be able to happen now and claims staff involved in the scandal were no longer with the group.

Medi-Clinic earlier cemented the defensive qualities of private hospitals when it reported a 19% rise in interim headline earnings per share.

The only hiccup was a decline in its traditionally strong cash flow, though group chief financial officer Craig Tingle said that was essentially technical, the result of a dispute that prevented some invoicing in Switzerland.

“It will come through: we expect full recovery by the end of the year,” Tingle said.

While Netcare is large in Britain, latest results - boosted by volume growth in its NHS business, where it’s the largest private hospital provider to the British government – show Medi-Clinic has even better global diversification.

Apart from SA, it operates private hospitals in Namibia, Switzerland and the United Arab Emirates.

Yet while the private hospital groups will appeal to investors for both defensive and growth qualities, the pharmaceuticals sector on the JSE is even better: except share prices have run so far ahead the counters are outrageously expensive.

On that basis, fundamental analysis would label Aspen Pharmacare Holdings [JSE:APN] (its share price up 45.4% over the past year) and Cipla Medpro SA [JSE:CMP] (up 49%) as sells except for long-term shareholders who bought some time ago.

On a slightly more moderate forward earnings multiple of 13.6 times Adcock Ingram [JSE:AIP] is perhaps the only pharmaceutical worth buying, despite its share price advancing 35.7% over the past year.

Generally, pharmaceutical shares are less prone to outside interference and operational and reputational risk like Netcare.

They just pump out medication – from generics to ethical medicines (obtained on prescription only) – and earnings flow and their share prices increase.

The biggest drawback in the case of the latter is that share prices run too hard, making the counters too expensive, as is currently the case.

And while unlikely under the strict regulations and conditions pharmaceutical factories now operate under, products and reputations can go wrong.
 
Pharmaceuticals certainly share the global diversification of the private hospital groups.

Under Stephen Saad, Aspen has expanded to a number of strategic operations worldwide, with operating profit roughly equally balanced between SA and offshore.

And Cipla Medpro SA has a very useful link with Cipla India, which might become a more formal arrangement.

That still leaves little choice for the investor as to the “better” defensive stock.

Private hospitals are more open to external risk and pharmaceutical shares are too expensive.

Perhaps that’s the choice: accept a little more risk or pay through the nose.


- Finweek

This article first appeared in Finweek.
Click here to read more Finweek articles.

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