State lifts healthcare sector

Johannesburg - The dearth of adequate healthcare means the SA government needs private healthcare providers more than the healthcare sector needs government - a feature that makes the sector attractive to investors, an analyst has said.

The threat of regulation has long loomed over the healthcare sector. The prospect of government intervention, particularly in the medical insurance space, is a great unknown for investors.

In addition, the growing disparity between the levels of healthcare provided by the private sector and those offered by the public sector is something government is trying to tackle.

"Government will shoot itself in the foot if it disincentivises private healthcare providers to supply services or products at a fair and reasonable return level," said Nino Frodema, a portfolio manager at Metropolitan Asset Managers.

Frodema said: "One of the biggest reasons why I like healthcare is that it is very defensive through the cycle [Netcare's shares are 11.9% higher against a one-third decline in the JSE on a one-year rolling basis]; a large part is due to the annuity nature of its business."

Frodema was speaking to Fin24.com after the release of Netcare's interim financial results to end-March on Monday, in which it posted a 15% increase in operating profit to R1.8bn. Revenue was up 12% to R11.6bn.

"South African hospital operators rate among the best service providers in the world, which provides an added comfort when investing in them," he said. Metropolitan Asset Managers holds shares in Netcare.

Upbeat UK performance

Frodema also applauded the performance of Netcare's UK business. "Given the economic woes plaguing the UK market, Netcare's UK operations have not seen 'self-pay revenue stream' fall off a cliff as was anticipated by the market."

Netcare works in partnership with the National Health Service (NHS), a subsidised healthcare offering managed by the UK government.

Netcare cautioned, however, that although the volume of work from the NHS outsourcing business was increasing, payments received were slower and might negatively affect cash flow for these operations.

"I think Netcare's long-term international prospects look encouraging. I think we will only really see the full benefits of its international strategy once they manage to make significant inroads in their debt situation," said Frodema.

"However, as the business de-leverages, those benefits should fall straight to the bottom line, which will enable Netcare to grow its earnings without it having to grow its top line by much," he said.

Netcare shares were 3c higher (0.3% higher) at 953c/share in late afternoon trade on Monday.

- Fin24.com