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Mediclinic earnings fall as maintains operational momentum

By Josh White

Date: Wednesday 17 Oct 2018

Mediclinic earnings fall as maintains operational momentum

(Sharecast News) - Private healthcare group Mediclinic International warned that full year profit margins would be below those expected by the market due to weak growth in Switzerland.
The FTSE 250 company said group revenue was up around 1% for the first half of the year, with weaker-than-expected growth in Swiss inpatient admissions of 3.6% and revenue per bed day down 2.8% that reflected the outmigration of care and a higher proportion of generally insured inpatients - 49.4%, compared to 46.9% a year earlier.

Hirslanden's outpatient revenues, which represent 19% of the overall division's revenue, continued to grow during the first half of the year, up 1.7%.

Mediclinic said that growth reflected the outmigration of identified clinical treatments transferring from an inpatient to an outpatient tariff across several cantons, which was offset by the national outpatient tariff reductions effective from 1 January.

Excluding the contribution from Linde which was acquired in July 2017, Hirslanden revenue was down around 1.5%, inpatient admissions were up 0.3% and the percentage of generally insured patients was 48.3%, up from 46.3% year-on-year.

The combination of the Hirslanden Clinique La Colline and Clinique des Grangettes in Geneva was announced in September, and would be effective from 1 October.

Mediclinic said the adjusted EBITDA margin for the period was around 14.3%, down from 17.4% and impacted by the recent outmigration and TARMED regulatory changes, partly offset by ongoing cost-management programmes and efficiency savings.

The adjusted EBITDA margin in the second half was expected to reflect the seasonal benefits of the winter period, and cost savings initiatives with a full year margin now expected of around 16%.

"The group has delivered on a number of key operational initiatives during the first half of the financial year," said chief executive officer Dr Ronnie van der Merwe.

"In Switzerland, we announced the combination of Hirslanden Clinique La Colline and Clinique des Grangettes, strengthening the leading market position of Hirslanden in the attractive Geneva market. We continue to progress with the Hirslanden 2020 strategic programme."

At Mediclinic Southern Africa, first half revenue was up around 5% to ZAR8.0bn, with inpatient bed days increasing by 0.5% and revenue per bed day increasing by 4.5%.

The division saw fewer pneumonia and bronchitis related cases during the winter, largely offsetting the strong bed day growth in the first half of the period.

Its adjusted EBITDA margin was around 21.2%, up from 21.0%, as a result of a continued focus on cost-management and efficiencies.

Overall performance for the full year remained on track.

"In Southern Africa, in-line with our strategy to expand Mediclinic's primary care and day clinic presence, we have completed the investment in the Intercare day clinic business and Welkom Medical Centre," said van der Merwe.

"In addition, we recently completed the build of our fourth day clinic at Mediclinic Newcastle which is expected to open shortly."

At Mediclinic Middle East, the "characteristically quieter" first half saw revenue growth of around 5% to AED1.5bn.

Inpatient admissions were up 3.1% whilst outpatient volumes were down 0.8%, reflecting the divestment of non-core facilities and a successful insurance mix strategy in Abu Dhabi.

Mediclinic said that strategy resulted in Thiqa and Enhanced volumes increasing by 20% and 11% for inpatients and outpatients respectively whilst lower tariff basic insurance volumes for inpatients and outpatients declined by 35% and 32% respectively.

The adjusted EBITDA margin for the first half was said to be in line with expectations at around 9.4%, up from 8.5%, including the start-up costs associated with the new Mediclinic Parkview Hospital that opened in September.

Seasonal benefits of the second half in the Middle East, combined with the continued gradual improvement in the Abu Dhabi patient mix, were expected to deliver a strong second half performance.

For the full year, overall EBITDA performance remained on track with revenue growth now expected to be in the high single-digits with a resulting improvement in the expected EBITDA margin.

"In the Middle East, the 182-bed Mediclinic Parkview Hospital in Dubai opened in September on time and in budget," van der Merwe commented.

"We look forward to the hospital being a key contributor to the growth of this division as it ramps up over the coming years."

Closer to home, Mediclinic continued to hold a 29.9% investment in Spire Healthcare Group, which reported a disappointing first half performance to 30 June reflecting "significantly declining" NHS admissions, lower-than-anticipated growth in private admissions and planned investment in clinical quality and consumer engagement.

The company said the investment in Spire was accounted for on an equity basis, recognising the reported profit of £8.2m for Spire's financial half-year ended, which was down from £8.9m.

Mediclinic's first-half equity-accounted share of profit from Spire was £1.8m, rising from £1.1m, after adjusting for the amortisation of intangible assets recognised in the notional purchase price allocation of the equity investment.

The carrying value of the group's investment in Spire would be considered as part of the interim review process, and reported with the results for the first half, Mediclinic said.

At the group level, in constant currency, first half revenue was up 2% and adjusted EBITDA was down around 4%.

On a reported basis, revenue for the period was down around 1% at £1.4bn, and adjusted EBITDA fell around 8% to £0.21bn.

Adjusted earnings per share were expected to be around 10p, falling from 11.3p.

"Trading in the first half of the year experienced the customary seasonality in Switzerland and the Middle East," Ronnie van der Merwe added.

"In the Middle East, we delivered a gradual improvement in revenue and margin expansion ahead of the anticipated stronger growth in the second half of the year.

"In Switzerland, the business continues to adapt to recent regulatory changes in the outpatient environment, which in the period had a greater than expected impact on admissions and the insurance mix."

In Southern Africa, van der Merwe noted that margins were maintained on lower volumes due to weakness in the second quarter from fewer pneumonia and bronchitis related cases during the winter.

"For the full year, our performance in Southern Africa remains in line with guidance.

"In the Middle East, full year EBITDA delivery remains on track with revenue growth lower than previously expected.

"In Switzerland, we now expect to deliver modest revenue growth in the full year including contribution from Clinique des Grangettes, with an adjusted EBITDA margin of around 16%."

Van der Merwe said that, as the firm highlighted at its capital markets day in June, it was adapting the business to the changing healthcare landscape.

"Leveraging our core skills in efficiently operating world-class acute care hospitals and providing quality clinical care, we are expanding our presence across the continuum of care to increase the value proposition to our patients and all stakeholders.

"I am very positive about the opportunities ahead, successfully leveraging our international reputation and brand."

Mediclinic, which said it would release its full first-half results on 15 November, shares fell 17% to 393p by Wednesday afternoon, hitting a new all-time low below 380p earlier in the morning.

First half results are below guidance on Switzerland margins, analyst Morgan Stanley noted.

"Mediclinic is now guiding for full year margins of 16%, well below ours and consensus (and previous guidance) of 17.3%. The company is non-commital about whether this is the trough.

"Mediclinic is operating in a tough environment where regulation and outmigration, and the pace at which change is occurring, is having a significant impact on the business. We understand it is difficult for the company to predict the endgame here, as it is evolving fast, but we expect the miss on guidance and lack of visibility will be taken negatively by the market."



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