COMMENTARY

Overview

Life Healthcare continued to grow during the six months ended 31 March 2013 adding 80 (2012: 154 beds) acute care hospital and mental health beds during the period to meet the growing demand for services. The growth in hospital paid patient days (PPDs) of 1,5% was adversely impacted by the number of public holidays in the second half of March compared to 2012. Efficiencies remain a priority with an occupancy of 69,0% (2012 – 70,3%) being achieved on an increased number of active beds, supported by cost containment programmes. The clinical quality programmes continue to deliver improved medical outcomes as measured by our key clinical indicators as well as decreasing our Healthcare Acquired Infection (HAI) rate.

The Group’s investment in Max Healthcare, India resulted in a negative contribution of 4 cps for the six-month period (2012: 2 cps for the two-month period). Max Healthcare, India however, showed a good improvement in revenue for the last six months as occupancies improved and additional beds at the new facilities became operational. Business efficiency programmes resulted in EBITDA margins improving at hospital level.

Financial performance

Group revenue increased by 7,0% to R5 638 million (2012: R5 271 million). Hospital division revenue increased by 6,5% to R5 226 million (2012: R4 905 million) driven by the 1,5% increase in PPDs and higher revenue per PPD of 5,0%. The six months to 31 March resulted in a higher proportion of medical cases over surgical cases which diluted the revenue growth per PPD by approximately 1,5%. Healthcare Services revenue increased by 12,3% to R410 million (2012: R365 million) due to improved performances from both Life Esidimeni and Life Occupational Health.

The Group continues to focus on driving efficiencies across the business to ensure services remain affordable and to improve margins. The alternative reimbursement model (ARM) provides an incentive to actively manage input costs, which together with the strong management in procurement, employment costs and overheads allowed the Group to leverage efficiencies across its fixed cost base resulting in an operating profit increase of 12,7% to R1 361 million (2012: 1 208 million).

A key management measure which is a non-IFRS measure of business performance is normalised EBITDA (Life Healthcare defines normalised EBITDA as operating profit plus depreciation, amortisation of intangible assets, impairment of intangible assets as well as excluding profit/loss and fair value adjustments on disposal of businesses and surpluses/deficits on retirement benefits) which increased by 12,9% to R1 547 million (2012: R1 370 million). The higher proportion of medical cases contributed to the EBITDA margin increasing to 27,4% (2012: 26,0%).

R Million   6 months
31 March
2013
Unaudited
  6 months
31 March
2012
Unaudited
  12 months
30 Sept
2012
Audited
 
Normalised EBITDA              
   Operating profit   1 361   1 208   2 542  
   Profit on disposal of businesses     (32)   (30)  
   Loss on derecognition of finance lease asset   4      
   Profit on disposal of property       (9)  
   Gain on bargain purchase       (2)  
   Additional receipt on previous disposed business     (2)   (2)  
   Loss on remeasuring of fair value of equity interest before business combination     3   3  
   Depreciation on property, plant and equipment   176   160   318  
   Amortisation of intangible assets   57   57   124  
   Retirement benefit asset   (41)   (21)   (42)  
   Post-retirement medical aid   (10)   (2)   5  
Normalised EBITDA   1 547   1 370   2 907  
Normalised EBITDA as % of turnover   27,4%   26,0%   26,6%  

Cash flow

Streamlined administrative processes contributing to tighter working capital management in combination with improved collections of government related debt resulted in cash generated from operations increasing by 24,3% to R1 247 million (2012: R1 003 million), representing 80,6% (2012: 73,2%) of normalised EBITDA.

Financial position

The Group is in a strong financial position with a low gearing. Net debt to normalised EBITDA as of 31 March 2013 is 0,8 times, well within the bank covenants of three times. The Group has the financial flexibility to continue to invest both locally and internationally.

Headline earnings per share (HEPS) and normalised earnings per share

Headline earnings per share increased by 19,8% to 76,4 cps (2012: 63,8 cps). Earnings per share on a normalised basis, which excludes non-trading related items, increased by 14,5% to 71,3 cps (2012: 62,3 cps). Normalised earnings per share excluding the impact of Max Healthcare, India increased by 18,8% to 75,3 cps (2012: 63,4 cps).

R Million   6 months
31 March
2013
Unaudited
  %
Change
  6 months
31 March
2012
Unaudited
  12 months
30 Sept
2012
Audited
 
Normalised earnings                  
Profit attributable to ordinary equity holders   790       690   1 496  
Adjustments (net of tax):                  
   Profit on disposal of businesses         (27)   (25)  
   Loss on derecognition of finance lease asset   3          
   Profit on disposal of property           (7)  
   Gain on bargain purchase           (2)  
   Additional receipt on previous disposed business         (2)   (2)  
   Loss on remeasuring of fair value of equity interest before business combination         3   3  
   Gain on derecognition of finance lease liability   (16)          
   Retirement funds   (36)       (16)   (27)  
Normalised earnings   741       648   1 436  
Normalised EPS (cents)*   71,3   14,5   62,3   138,1  

Capital expenditure

During the current financial year, Life Healthcare invested R216 million (2012: R1 033 million, R210 million in Southern Africa and the investment in Max Healthcare, India R823 million). A further R536 million has been allocated for capital projects for the remainder of the 2013 financial year. A number of these projects’ timing of the cash flow spend is dependent on local and regional authorities planning approvals. This investment in the Group’s facilities ensures that the demand for services is met and the Group remains abreast of modern technology and standards.

Cash dividend

The directors approved an interim cash dividend of 54 cents per ordinary share (2012: 45 cents per ordinary share) amounting to R562 793 265 (2012: R468 994 388) out of income reserves. R23 689 800 of the dividend is subject to secondary tax on companies (STC) (2,27304 cps). The balance of the dividend amounting to R539 103 465 will be subject to dividend withholding tax at a rate of 15%, which will result in a net dividend of 46,24096 cents per share to those shareholders who are not exempt in terms of section 64F of the Income Tax Act.

The issued share capital at the declaration date is 1 042 209 750 ordinary shares.

In compliance with the requirements of the JSE Limited, the following dates are applicable:

Last day to trade cum the dividend Friday, 31 May 2013
Trading ex the dividend commences Monday, 3 June 2013
Record date Friday, 7 June 2013
Payment date Monday, 10 June 2013

Share certificates may not be dematerialised or rematerialised between Monday, 3 June 2013 and Friday, 7 June 2013, both days inclusive.

Changes to the board of directors

Professor GJ Gerwel passed away on 28 November 2012, MA Brey was appointed as chairman of the board on 14 February 2013 and K Gordhan resigned as director on 22 February 2013. RJ Hogarth will retire as an executive director on 31 May 2013 and will be replaced by PP van der Westhuizen who will take over as the new Chief Financial Officer.

Outlook

Despite a tougher economic environment the Group expects to see increased demand for hospital services and the additional growth in medical cases is expected to continue. The Group plans to add an additional 1 000 acute hospital, mental health and acute rehabilitation beds in South Africa over the next three to four years.

The Group will continue to focus on driving operational efficiency through the management of cost of sales, streamlining administrative processes, and the completion of the Impilo modules.

The underlying fundamentals in India for private hospital services are strong and the Group is confident that Max Healthcare, India will continue to show improved revenues and EBITDA margins. The Group will continue to look for additional growth opportunities in India and Africa.

Thanks

The contribution of the doctors, nurses and other employees of Life Healthcare have greatly enhanced the quality of our performance. We thank them for their contributions.

Approved by the board of directors on 13 May 2013 and signed on its behalf:

Mustaq Brey Michael Flemming
Chairman Chief Executive Officer
   
13 May 2013