Commentary

Overview

Life Healthcare continued to grow during the period under review and is in a healthy financial position to deliver on its strategic objectives of growth, efficiency and sustainability. Activities as measured by hospital paid patient days (PPDs), increased by 6,0% as a result of an increased demand for hospital services due to high incidence of disease together with a growing and aging medical aid population and preferred network arrangements. Additional beds have been added to the business to cater for this additional demand, including the opening of Life Glynnview (Mental Health) in April 2011, the acquisition of Life Midmed in August 2011, the opening of Life Vincent Palotti Rehabilitation in September 2011 and the addition of 154 beds in the current period including the opening of Life Piet Retief Hospital and Life St Josephs (Mental Health).

The total number of registered beds at 31 March 2012 is 8 212.

The Max Healthcare India investment of R823 million resulted in a 26% shareholding.

Life Healthcare continued to improve on its clinical quality metrics during the period under review resulting in an improvement in its hospital acquired infection rate.

Financial performance

Group revenue increased by 11,7% to R5 271 million (2011: R4 718 million). Hospital division revenue increased by 11,7% to R4 905 million (2011: R4 393 million) driven by the 6,0% increase in PPDs and higher revenue per PPD of 5,2%. Healthcare Services revenue increased by 12,7% to R365 million (2011: R324 million). Life Esidimeni revenue grew in line with inflation while Life Occupational Healthcare concluded new contracts and provided additional services to existing clients.

The Group continues to focus on efficiencies across the business to ensure services remain affordable. The alternative reimbursement model (ARM) provides an incentive to actively manage input costs, which together with slightly higher occupancies of 70,3% (2011: 69,5%) allowed the Group to leverage efficiencies across the existing base resulting in an operating profit increase of 22,4% to R1 208 million (2011: R987 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 17,5% to R1 370 million (2011: R1 166 million).

  R Million   6 months
31 March
2012
Unaudited
  6 months
31 March
2011
Unaudited
  12 months
30 Sept
2011
Audited
 
  Normalised EBITDA              
     Operating profit   1 208   987   2 173  
     Profit on disposal of businesses   (32)   (4)    
     Additional receipt on previous disposed business   (2)     (5)  
     Loss/(Gain) on remeasuring of fair value of equity interest before business combination   3     (92)  
     Depreciation on property, plant and equipment   160   146   299  
     Impairment of intangible assets       65  
     Amortisation of intangible assets   57   60   110  
     Retirement benefit asset movement   (21)   (20)   (2)  
     Post-retirement medical aid movement   (2)   (3)    
     Normalised EBITDA   1 370   1 166   2 548  
     Normalised EBITDA as % of turnover   26,0%   24,7%   26,0%  

Cash flow

The business generated solid cash flows, however, weak collections of government related debt, contributed to a decrease of 6,2% in cash generated from operations to R1 003 million
(2011: R1 069 million).

Financial position

The Group is in a strong financial position with a low gearing. Net debt to normalised EBITDA is 0,97 as of 31 March 2012 after the Max Healthcare investment. The Group has the financial flexibility to continue investing in the growth of the business.

Normalised earnings per share

The earnings on a normalised basis, which excludes non-trading related items as set out below, increased by 21,9% to 62,3 cps (2011: 51,1 cps) and excluding the amortisation of intangibles by 19,9% to 66,2 cps (2011: 55,2 cps).

  R Million   6 months
31 March
2012
Unaudited
  %
Change
  6 months
31 March
2011
Unaudited
  12 months
30 Sept
2011
Audited
 
  Normalised earnings                  
  Profit attributable to ordinary equity holders   690       552   1 287  
  Adjustments (net of tax):                  
     Profit on disposal of businesses   (27)       (3)    
     Additional receipt on previous disposed business   (2)         (4)  
     Loss/(Gain) on remeasuring of fair value of equity interest before business combination   3         (92)  
     Impairment of intangible assets           54  
     Retirement funds   (16)       (17)   (2)  
  Normalised earnings   648       532   1 243  
  Amortisation of intangible assets (net of tax)   41       43   79  
  Normalised earnings (excluding amortisation of intangible assets)   689       575   1 322  
  Normalised EPS (cents)   62,3   21,9   51,1   119,3  
  Normalised EPS – excluding amortisation (cents)   66,2   19,9   55,2   126,9  

Shareholders dividend

Notice is hereby given that the directors have declared an interim cash dividend of 45 cents per ordinary share (2011: 31 cents per ordinary share) out of income reserves in respect of the six months to 31 March 2012. The Group has utilised STC credits amounting to 9.877 cents per share. The balance of the dividend will be subject to a dividend withholding tax at a rate of 15%, which will result in a net dividend of 39.732 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.

The salient dates for the dividend will be as follows:

Last day to trade cum the distribution Friday, 1 June 2012
Trading ex dividend commences Monday, 4 June 2012
Record date Friday, 8 June 2012
Payment date Monday, 11 June 2012

Share certificates may not be dematerialised or rematerialised between Monday, 4 June 2012 and Friday, 8 June 2012, both days inclusive.

Capital expenditure

During the current period, Life Healthcare invested R1 033 million (2011: R235 million) including capital projects of R199 million (2011: R235 million) and the Max Healthcare India investment of R823 million. The board has approved a capital expenditure budget of R686 million for the financial year and capital expenditure of R440 million has been approved as at 31 March 2012. This investment in the Group’s facilities is to ensure that the demand for services is met and the Group remains abreast of modern technology and standards.

An additional 141 beds are projected to be commissioned in the second six months.

Changes to board of directors

There have been no changes to the board of directors during the period ended 31 March 2012.

Outlook

Subject to the current economic conditions prevailing for the rest of the financial year, the Group expects continued growth in earnings.

Growth

The Group will continue to focus on its growth objectives in South Africa by adding additional beds through brownfield expansion and mental healthcare, including the 80 bed Life Poortview mental health facility in Gauteng. Life Healthcare will assist Max Healthcare to improve its business operations.

Efficiency

The Group will continue to focus on driving operational efficiencies in South Africa through; cost of sales, procurement, streamlined administrative processes; the re-engineering of certain IT systems and improving hospital occupancies to enable the leveraging of the fixed cost base.

Sustainability

The Group will continue to focus on and expand its quality management programme which is a comprehensive, consistently applied and measured programme which benchmarks clinical interventions against international best practice with the aim of enhancing patient outcomes. In addition the Group recognises the shortage of healthcare skills and will continue to invest heavily in the training of doctors, nurses and pharmacists. In connection with the development of healthcare policy and proposed healthcare reforms, the Group will continue to actively engage with the South African government.

Thanks

The contribution of the doctors, nurses and employees of Life Healthcare have greatly enhanced the quality of our performance. For their effort, we extend our thanks. Approved by the board of directors on 10 May 2012 and signed on its behalf:

Professor Jakes Gerwel Michael Flemming
Chairman Chief Executive Officer

10 May 2012