Costly UK rentals hit Netcare subsidiary

Author: Giulietta Talevi

CEO Richard Friedland says PropCo at the last minute changed some of the conditions the company thought were settled.

Netcare’s UK business, BMI Healthcare, remains in limbo due to costly rental agreements with the entity that houses its hospital properties. CEO Richard Friedland says talks over a rental deal have been “frustrating and disappointing” for the market.

Some of the conditions it thought had been agreed to in November with PropCo, in which private equity gorilla KKR had a stake, were changed at the last minute, Friedland said on Monday. An agreement with its largest landlord had to be to shareholders’ benefit, he said.

Netcare said operating profit in the UK slumped 55% to £6m for the six months to March. Profit margin narrowed to 5.2% from 7.2% previously. Netcare blamed the fall primarily on an increase in rental costs and the absence of a series of one-offs.

But the hospital group is seeing no uptick in the UK’s private medical insurance market, with caseloads down 3.6% over the period. The National Health Service remains its biggest customer in the UK, with caseload up 8.5%, lifting the division’s revenue by 3.22%, to £458m.

Netcare’s normalised operating profit slid 13.5% to R1.7bn for the interim period, hurt by a stronger rand.

The hospital group kept its interim dividend at 38c a share with debt, at R6.7bn, fractionally lower year on year. Cash flows dropped nearly 18%.

In SA, Netcare experienced a drop in activity from private-paying and foreign patients, as well as patients injured on duty covered by the workmen’s compensation scheme.

Netcare also blamed an increase in “higher-complexity” cases that resulted in more expensive treatment on which the group earned no margin.

An investment in solar is starting to pay off, causing electricity consumed per hospital bed to fall up to 18% in three years, with a targeted 30% reduction over 10 years.

Lentus Asset Management portfolio manager Nic Norman-Smith said the local hospital sector remained under pressure with medical aid membership stagnating. Still, ageing populations and high levels of regulation were positives, he said. “The market was too positive before and I think Netcare, Mediclinic and Life [Healthcare] are trading where they should be.”

Netcare’s shares closed Monday 1.81% weaker at R49.

Source: Business Day