Netcare Group 2017 annual financial results

Trying market conditions place pressure on Netcare’s ability to grow, but the outlook for next year has improved

Monday, November 20 2017

“The 2017 financial year was an unusually difficult period for Netcare,” says group chief executive officer, Dr Richard Friedland.

“Market conditions in both South Africa and the United Kingdom placed pressure on our ability to grow, while funder-led demand management initiatives in both geographies impacted our results. South Africa experienced negative patient day growth for much of the year, and despite overall UK caseload volumes growing marginally, there was a fall in our higher revenue in-patient cases not fully offset by the increase in day cases.”

Key financial results for the year ended 30 September 2017 include:

  • Group revenue decreased by 9.6% to R34 125 million from R37 729 million, with the decline being attributable to currency conversion. In constant currency terms, revenue is broadly flat year-on-year, with a 1.2% increase in SA revenue being offset by a similar decrease in UK revenue.
  • Excluding exceptional items, normalised group earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 22.7% to R4 265 million from
  • R5 518 million.
  • Normalised operating profit fell 28.1% to R2 966 million (2016: R4 128 million).
  • Normalised profit after taxation fell by 38.7% to R1 774 million, from R2 892 million.

The 2017 results also reflect some large, non-recurring transactions, including:

  • A capital profit on the sale of the old Netcare Christiaan Barnard Memorial Hospital (“CBMH”) land and buildings of R203 million (R169 million after tax);
  • A non-cash profit of R937 million (2016: loss of R1 858 million) after tax, arising on the revaluation of UK RPI swap instruments; and
  • Non-cash negative adjustments totalling R5 563 million relating to UK operations, comprising the impairment of property, plant and equipment (R1 540 million), recognition of onerous lease provisions (R1 669 million), and impairment of goodwill (R2 354 million).

Group adjusted headline earnings per share, from continuing operations, reduced by 24.6% to 149.6 cents (2016: 198.5 cents).

The significant non-cash UK impairments also impacted Netcare’s balance sheet, with total assets at year end reducing by 8.3% to R28 112 million, and shareholders’ equity decreasing 31.9% to R8 862 million (2016: R13 009 million). Due to higher debt balances and lower normalised earnings, the net debt to EBITDA ratio moderated to 1.5 times (2016: 1.0), with interest cover at 6.7 times (2016: 11.1).

South Africa

Revenue from continuing operations increased by 1.2% to R19 114 million; normalised EBITDA from continuing operations was lower by 3.7% at R3 975 million (2016: R4 126 million) with margins of 20.8% (2016: 21.8%); and normalised operating profit from continuing operations declining by 5.6% to R3 331 million (2016: R3 528 million).

SA Hospitals and Emergency Services
With healthcare funders implementing more stringent demand management strategies, patient days fell by 1.0%. Full week occupancy levels of 65.5% improved from 63.2% reported at the half-year, although occupancies are still lower than the 67.2% reported for 2016. Revenue per patient day increased by 6.4%, ahead of inflation due to an increase in the mix of higher complexity cases. The specialist base has grown by a net 136 doctors.

EBITDA excluding capital items, most notably the profit from the sale of the old Netcare CBMH land and buildings, decreased by 3.3% to R3 875 million (2016: R4 008 million) at an EBITDA margin of 21.1% (2016: 22.6%). Underlying EBITDA increased by 0.7% year-on-year at an EBITDA margin of 21.4% (2016: 22.3%). Margins have been adversely influenced largely by volume contraction and cost inflation, as well as rental charges on the new Netcare CBMH in Cape Town.

“Despite our significant focus on cost control – such as automation and centralisation of administrative processes, and sustainability programmes to control electricity, water and waste expenditure – the savings realised were not sufficient to absorb countervailing margin pressures in the current year,” says Dr Friedland.

SA Primary Care
The Primary Care division recently underwent positive structural changes, including the outsourcing of retail pharmacies to Clicks. The outsourced pharmacies continue to perform well under the new arrangement and have shown solid growth in scripts for the past 10 months. The division reported lower revenue as a result of the changes to its business model but the EBITDA margin reflected a positive improvement to 15.2% from 10.0%.

United Kingdom

“This was a particularly challenging year for our UK operations with an acceleration of demand management initiatives implemented by both the National Health Services (“NHS”) and private medical insurers,” notes Dr Friedland.

“Patient activity was impacted by a change in case mix in favour of more day cases, with reduced in-patient admissions.”

To address critical funding constraints within the UK’s public health system, the NHS is focusing on demand management strategies, which has led to the downgrading of NHS elective referrals in the short term and the introduction of triage and referral management centres. This has impacted several BMI Healthcare sites.

“However, such NHS strategies are generally expected to defer hospital treatment, rather than completely remove the need for it,” comments Dr Friedland. “We are consequently seeing the self-pay market absorbing some of the activity in the meantime.”

UK revenue decreased by 0.9% to £887.1 million (2016: £895.5 million) driven by the shift in case mix towards lower revenue cases.  Cost pressures also include labour costs which are not yet aligned to the decline in in-patient activity versus the growth in day cases. EBITDA fell 60.7%, before one-off costs, to £25.1 million from £63.8 million; with this margin deteriorating from 7.1% in 2016 to 2.8% in the current year. An operating loss of £20.6 million was reported (2016: profit of £28.7 million).

The combination of the weaker trading results and contractual rental commitments resulted in a review of the carrying value of property, plant and equipment and goodwill, as well as a consideration of onerous lease obligations. Consequently, non-cash accounting adjustments in the aggregate of R5 563 million (£316.3 million) were recognised in the 2017 results, allocated to the impairment of property, plant and equipment, onerous lease provisions and the impairment of goodwill.

“Netcare has reached agreement with the minority shareholders in General Healthcare Group (“GHG”) to acquire their interests in GHG, subject to certain conditions precedent. Once met, GHG will become a wholly-owned subsidiary of Netcare and this will enable us to assume full operational and management control of our UK operations,” says Dr Friedland.


In South Africa, Netcare expects patient days to continue the upward trend experienced over the past five months. With no short-term plans to increase bed count, existing capacity will be improved by converting beds to higher demand disciplines and transferring beds from under-utilised to higher demand facilities. The business expects to benefit from the restructuring of the Emergency Services business and improved performance from the new Primary Care day theatre and sub-acute facilities.

Reductions in the cost base will be driven by investment in IT and other technology and efficiency projects to mitigate underlying margin pressures. In addition, Netcare has embarked on a major IT digitalisation of its front end services and will be introducing electronic medical and nursing records across all divisions in a three-year roll-out programme.

Planned capital expenditure in SA during 2018 of approximately R1.35 billion covers the Netcare Milpark Hospital expansion project, other hospital refurbishments, upgrades of medical equipment and the growth of Netcare’s cancer services, day theatre and sub-acute networks.

The UK healthcare market is underpinned by strong long-term demand drivers. Notwithstanding this, the challenges prevalent in H2 2017 are unlikely to abate in H1 2018. The PMI market is expected to remain challenging, with shorter term demand in the NHS remaining uncertain due to on-going demand management strategies such as triage and referral management. The growth in NHS elective surgical waiting lists is expected to result in more patients choosing to pay for their own treatment and thus driving increases in self-pay volume.

The UK operation has embarked on a restructuring programme to address areas of underperformance and reduce its operating cost base. The company also expects to enter into renewed negotiations with its major external landlord regarding a reduction in rentals on 35 hospital properties.

For further information please refer to SENS Announcement, audio presentation as well as the accompanying slide presentation on


Notes to journalists

Netcare (JSE: NTC) Netcare operates the largest private hospital, primary healthcare, emergency medical services and renal care networks in South Africa. In addition to its world-class acute private hospital services in SA and the UK (the latter offered through BMI Healthcare), Netcare provides:

  • primary healthcare services, occupational health and employee wellness services through Medicross;
  • emergency medical services through Netcare 911; and
  • renal dialysis through National Renal Care.

Netcare also has the distinction of being a leading private trainer of emergency medical and nursing personnel in the country.

Netcare’s core value is care. From this value flow four others, namely dignity, participation, truth and passion. We work hard to entrench these values in every action, decision and intervention we take with our patients, their families, our colleagues and communities.

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Issued by:           MNA on behalf of Netcare Limited
Contact:               Martina Nicholson, Graeme Swinney, Meggan Saville or Pieter Rossouw
Telephone:        (011) 469 3016
Email:                   mar[email protected], [email protected], [email protected] or