Netcare's margins enter the recovery room


Netcare's margins enter the recovery room


Published Date: 2021-10-25 | Source: INCE|Community | Author: The Finance Ghost

Netcare's margins enter the recovery room

Netcare has released a voluntary trading update for the financial year ended September 2021. It gives incredible insights into the pandemic and the impact it had on the hospital groups.

For example, the update notes that a quarter of admitted Covid cases ended up in ICU or High Care. At one point, 80% of acute hospital beds were allocated to Covid.

By the second half of the 2021 financial year (i.e. April to September 2021), that percentage had dropped to 52%. This is despite patient admissions peaking in July, especially in Gauteng during the third wave with the Delta variant. As a good news story against a backdrop of so much suffering, this shows how much the medical professionals learnt about treating Covid between the first and the third wave.

In perhaps the most shocking statistic of the entire announcement, patient days for mental health were up a whopping 55.3% in the second half of the financial year vs. the comparable period. That's the legacy of lockdown filtering through the system and it's terribly sad to see.

Of course, the hospital groups make money when people need help, so they see an increase in mental health occupancy as an "improvement" (to the financials at least). Mental health occupancy increased from 55% in FY20 to 62.1% in FY21.

The overall impact of Covid was that elective surgeries were suspended for months at a time during the most severe periods of each wave. Only medically necessary and time-sensitive surgeries were performed during these periods. This had a significant negative impact on the acute business, which has now posted a partial recovery with patient days up 6.2% and revenue per patient day up 5.4%. This reflects a change in mix of treatments over the period.

Moving on to financial metrics, Netcare reduced net debt by R1.1 billion during the past year and the business is compliant with banking covenants. The fact that the SENS focuses on these solvency measures shows you how tough this period was for hospital groups. Net debt to EBITDA has dropped to 1.7x from 2.5x a year ago.

Revenue for the full year was up between 11% and 12%, with the major growth coming in the second half of the financial year (between 33.7% and 35% higher than the comparative period). The benefit of operating leverage during a recovery is clear to see, with EBITDA (earnings before interest, taxes, depreciation and amortisation) up between 22% and 26% for the year.

Group EBITDA margin will be between 14.9% and 15.3%, still well below pre-Covid levels of around 22%. This is arguably the most important metric to watch.

Medical and dental consultations were narrowly higher in FY21, up 0.8% on a like-for-like basis. This is despite the lack of a seasonal flu. Revenue was down 2.5% although EBITDA jumped 33% thanks to strict cost management. This took EBITDA margin in this business to 20.5% from 15.2% last year.

Working capital has also improved. Inventory is around R550 million lower than a year ago, as the higher-priced PPE and Covid-19 drugs bought during the first wave were consumed in the group.

There will be some impairments in this result, including R30 million related to the Lesotho Public-Private Partnership (which the government has terminated) and R70 million on properties, primarily related to two facilities being vacated when the new Netcare Alberton facility opens.

Overall, the hospital group expects further stabilisation of activity provided there is no fourth wave. This should see EBITDA margins continuing to improve towards pre-pandemic levels.


Anderson Muza 1 month ago

The Finance Ghost is under rated. Come for the financial news. Stay for the chuckles. This has become a compulsory start to the day and probably the read I would keep if I was forced to pick only one. Putting leading established publications to shame

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