Commentary

OVERVIEW

The Group performed well in the six months ended 31 March 2016 with revenue up 10.9%, normalised EBITDA up 9.0% and headline earnings up 15.8%. The headline earnings increase of 15.8% above the 8.6% level is impacted by the contingent consideration released in respect of Polish acquisitions which will no longer be payable. The southern African operations experienced good activity growth with an overall paid patient day (PPD) growth of 2.7% (2015: 3.5%). This PPD growth was adversely impacted by the public holidays in March as compared to the same period last year. In line with the Group’s Polish strategy it has invested R740 million in Poland, including the acquisition of PGM. Life Healthcare has also invested a further R320 million in India to fund the Max Healthcare acquisition of Max Smart. The Group’s earnings continue to be impacted by the dilutive effect of the interest cost on the funding of the international investments.

OPERATIONAL REVIEW

Southern Africa
An additional 91 beds (2015: 90) and 17 renal dialysis stations have been added to the business. In the second half of the year the Group expects to add over 100 beds, of which most will be mental health beds, six renal dialysis stations and one oncology centre. Activities, as measured by PPDs, increased by 2.7% in the acute business driven largely by the increased capacity due to the additional beds and an increased length of stay resulting from higher acuity cases. This activity growth was adversely impacted by the public holidays in March with year to date PPD growth to April 2016 greater than 3.5%.

Occupancies continue to remain high and the overall weighted occupancy for the period was 69.9% (2015: 70.7%). Margins for the period declined slightly to 27.7% (2015: 28.0%), resulting primarily from Healthcare Services where government contracts have not been extended and the resulting impact of retrenchment costs. However, the margins in the acute facilities have remained stable, despite pressures from the weaker rand, salaries and overheads.

The Group continued to provide high-quality clinical care as evidenced by the positive clinical outcomes, hospital associated infection rates and patient incident rates in our facilities.

Poland
Executing on the strategy of establishing a comprehensive countrywide network of facilities resulted in the purchase of PGM for R685 million, which was funded in-country, bringing the total investment in Poland to R2.1 billion (30 September 2015: R1.4 billion).

The Scanmed Group now consists of 619 beds, 12 inpatient cardiology centres and 43 medical centres.

The Polish operation’s performance is slightly below expectations with EBITDA margins improving to 13.5% (2015: 11.8%). EBITDA margins were negatively impacted by:

slow revenue growth in the first quarter due to low overquota work;
the impact of the Easter holidays; and
initial integration costs of new business.

India
Max Healthcare continues to grow its hospitals in line with the business plan. The total investment from South Africa into Max Healthcare is R2.5 billion (30 September 2015: R2.2 billion), including the additional R320 million invested in this period to fund the Max Smart acquisition. Max Healthcare added 263 operational beds, of which 236 beds were from the acquisition of Max Smart. Max Healthcare has 2 320 operational beds as at 31 March 2016.

For the period, Max Healthcare grew net revenue by 27.7% and EBITDA increased by 38.7%. The overall EBITDA margin improved to 10.6% (2015: 9.8%).

The Indian operations continue to grow but the earnings of this business are impacted by both the funding cost and costs of acquisition and development incurred in respect of the business acquisitions. As these operations continue to ramp up the earnings will be low.

FINANCIAL PERFORMANCE

Group revenue increased by 10.9% to R7 860 million (2015: R7 089 million) consisting mainly of an 8.2% increase in southern African revenue to R7 288 million (2015: R6 734 million) and R572 million (2015: R355 million) revenue contribution from Poland. The southern African Hospital division revenue increased by 8.3% to R6 842 million (2015: R6 317 million) driven by a 2.7% increase in PPDs and a higher revenue per PPD of 5.6%, made up of an average 5.9% tariff increase and a 0.3% negative case mix impact. Healthcare Services revenue increased by 7.0% to R446 million (2015: R417 million), largely driven by the acquisition of Careways Wellness in the prior period.

Normalised EBITDA¹ increased by 9.0% to R 2 099 million (2015: R1 926 million). The EBITDA contribution from Scanmed was R77 million (2015: R42 million).

1 Life Healthcare defines normalised EBITDA as operating profit plus depreciation, amortisation of intangible assets, impairment of property, plant and equipment as well as excluding profit/loss and fair value adjustments on disposal of businesses, fair value adjustments, transaction costs and surpluses/deficits on retirement benefits.

R’m
6 months
31 March
2016
  %
Change
  6 months
31 March
2015
  12 months
30 September
2015
 
Normalised EBITDA                
Operating profit 1 826       1 645   3 502  
Contingent consideration released (66)         (21)  
Depreciation on property, plant and equipment 270       223   445  
Amortisation of intangible assets 65       57   127  
Other 4       1   (5)  
Normalised EBITDA 2 099   9.0   1 926   4 048  
Normalised EBITDA 2 099   9.0   1 926   4 048  
   Southern Africa 2 022   7.3   1 884   3 957  
   Poland 77       42   91  

CASH FLOW

The Group produced strong cash flows from operations and continues to generate positive free cash flow. The overall net cash flow position of the Group is negative, as a result of the increasing investing activities, primarily associated with the continuing international investments. This net cash outflow was funded through raising of debt in South Africa and Poland.

FINANCIAL POSITION

The Group maintains its strong financial position despite the impact of the current economic environment. Net debt to normalised EBITDA as at 31 March 2016 was 1.73 times (30 September 2015: 1.49 times). The increase in debt is primarily due to the acquisitions in Poland and funding for the Group’s 2016 capital expenditure programme. The bank covenant for net debt to EBITDA is 2.75 times.

The additional Max Healthcare investment of R320 million was funded by available cash resources. Poland funded its acquisitions through the raising of debt in-country.

The Scrip Distribution, with the election to receive the Cash Dividend, allows the Group to utilise the cash saved through the programme to support continued growth, affords shareholders the opportunity to increase their shareholding in the Group, and provides flexibility for those shareholders who would prefer to receive a Cash Dividend.

HEADLINE EARNINGS PER SHARE (HEPS) AND NORMALISED EARNINGS PER SHARE

HEPS increased by 15.8% to 93.0 cps (2015: 80.3 cps), impacted by the contingent consideration released in respect of Polish acquisitions which will no longer be payable. Earnings per share on a normalised basis, which excludes non-trading related items listed below and the effect of disposed/closed businesses, where applicable, increased by 8.6% to 87.1 cps (2015: 80.2 cps).

R’m
31 March
2016
  %
Change
  31 March
2015
  30 September
2015
 
Normalised earnings                
Profit attributable to ordinary equity holders 965       832   1 866  
   Contingent consideration released (66)         (21)  
   Other 5         (5)  
Normalised earnings 904   8.7   832   1 840  
Normalised EPS (cents) 87.1   8.6   80.2   177.4  
Southern Africa Operations (cents) 97.3       89.2   194.1  
International Operations (cents) 1.3       (0.3)   1.8  
Funding costs (international acquisitions) (cents) (11.5)       (8.7)   (18.5)  

CAPITAL EXPENDITURE

During the current financial period, Life Healthcare invested R1 343 million (2015: R2 284 million), comprising capital projects of R345 million (2015: R368 million), R320 million for the additional investment in Max Healthcare and R669 million (excluding the contingent consideration for PGM of R71 million) in new acquisitions by Scanmed. The Group has approved R1 billion of its 2016 capital expenditure programme to date.

CHANGES TO BOARD OF DIRECTORS

There have been no changes to the board of directors for the period ended 31 March 2016.

SCRIP DISTRIBUTION AND CASH DIVIDEND ALTERNATIVE

1. Introduction
The board has declared an interim distribution for the period ended 31 March 2016, by way of the issue of fully paid Life Healthcare Group Holdings Limited ordinary shares of 0.0001 cent each (the Scrip Distribution) payable to ordinary shareholders (Shareholders) recorded in the register of the Company at the close of business on the Record Date, being Friday, 17 June 2016.

Shareholders will be entitled, in respect of all or part of their shareholding, to elect to receive a gross cash dividend of 73 cents per ordinary share in lieu of the Scrip Distribution, which will be paid only to those Shareholders who elect to receive the cash dividend, in respect of all or part of their shareholding, on or before 12:00 on Friday, 17 June 2016 (the Cash Dividend). The Cash Dividend has been declared from income reserves. A dividend withholding tax of 15% will be applicable to all shareholders not exempt, therefrom after deduction of which the net Cash Dividend is 62.05 cents per share.

The new ordinary shares will, pursuant to the Scrip Distribution, be settled by way of capitalisation of the Company’s distributable retained profits.

The Company’s total number of issued ordinary shares is 1 048 461 433 as at 10 May 2016. The Company’s Income Tax reference number is 9387/307/15/1.

2. Terms of the Scrip Distribution
The Scrip Distribution will be done at a 2.5% discount to the 15-day volume weighted average price (VWAP). The number of Scrip Distribution shares to which each of the Shareholders will become entitled pursuant to the Scrip Distribution (to the extent that such Shareholders have not elected to receive the Cash Dividend) will be determined by reference to such Shareholder’s ordinary shareholding in Life Healthcare Group Holdings Limited (at the close of business on the Record Date, being Friday, 17 June 2016) in relation to the ratio that 73 cents multiplied by 1.025 bears to the VWAP of an ordinary Life Healthcare Group Holdings Limited share traded on the JSE during the 15-day trading period ending on Wednesday, 1 June 2016. Where the application of this ratio gives rise to a fraction of a new ordinary share, such fraction will be rounded down to the nearest whole number, resulting in allocation of whole ordinary shares and a cash payment of a fraction.

Details of the ratio will be announced on the Stock Exchange News Service (SENS) of the JSE in accordance with the timetable below.

3. Circular and salient dates
A circular providing shareholders with full information on the Scrip Distribution and the Cash Dividend alternative, including a Form of Election to elect to receive the Cash Dividend alternative will be posted to Shareholders on or about Monday, 16 May 2016. The salient dates of events thereafter are as follows:

Announcement released on SENS in respect of the ratio applicable to the Scrip Distribution, based on the 15-day volume weighted average price ending on Wednesday, 1 June 2016 by 11:00 on Thursday, 2 June 2016
Announcement published in the press of the ratio applicable to the Scrip Distribution, based on the 15-day volume weighted average price ending on Wednesday, 1 June 2016 on Friday, 3 June 2016
Last day to trade in order to be eligible for the Scrip Distribution and the Cash Dividend alternative Thursday, 9 June 2016
Ordinary shares trade “ex” the Scrip Distribution and the Cash Dividend alternative on Friday, 10 June 2016
Listing and trading of maximum possible number of ordinary shares on the JSE in terms of the Scrip Distribution from the commencement of business on Friday, 10 June 2016
Last day to elect to receive the Cash Dividend alternative instead of the Scrip Distribution, Forms of Election to reach the Transfer Secretaries by 12h00 on Friday, 17 June 2016
Record Date in respect of the Scrip Distribution and the Cash Dividend alternative Friday, 17 June 2016
Scrip Distribution certificates posted and Cash Dividend payments made, CSDP/ broker accounts credited/updated, as applicable, on Monday, 20 June 2016
Announcement relating to the results of the Scrip Distribution and the Cash Dividend alternative released on SENS on Monday, 20 June 2016
Announcement relating to the results of the Scrip Distribution and the Cash Dividend alternative published in the press on Tuesday, 21 June 2016
JSE listing of ordinary shares in respect of the Scrip Distribution adjusted to reflect the actual number of ordinary shares issued in terms of the Scrip Distribution at the commencement of business on or about Wednesday, 22 June 2016

All times provided are South African local times. The above dates and times are subject to change. Any change will be announced on SENS.

Share certificates may not be dematerialised or rematerialised between Friday, 10 June 2016 and Friday, 17 June 2016, both days inclusive.

COMPETITION COMMISSION MARKET INQUIRY

Life Healthcare has made detailed submissions on the subject matter of the Market Inquiry. Public hearings commenced in February 2016 and Life Healthcare has participated in these hearings. We are yet to receive a revised timetable for the subsequent sets of hearings. This is a large and complex inquiry and Life Healthcare remains committed to participating in the Healthcare Market Inquiry.

OUTLOOK

In southern Africa the Group will continue to focus on its growth objectives. The Group aims to add over 20 acute hospital brownfield beds in the next six months. The complementary services business will grow through the addition of 95 mental health beds, which will only be operational towards the end of the financial year, six renal stations and the addition of an oncology unit, while a further oncology unit is under construction and will become operational in the 2017 financial year. There will be increased pressure on costs as a result of the historical weaker exchange rate, wage expectations and other overhead costs. The Group has implemented measures to mitigate the impact of these pressures and will continue to focus on driving efficiency programmes.

In Poland, the Group will continue to execute on its strategy of establishing a comprehensive network of facilities and will explore further acquisition opportunities, while maximising on growth opportunities at existing facilities. The Group will also continue to focus on improving margins through the driving of further efficiencies, the integration of newly acquired businesses and alignment to the Group’s best operating practices.

The Max Healthcare business will continue to focus on driving revenue through increasing the number of operational beds, bedding down the Vaishali and Max Smart acquisitions and improving operational efficiencies.

THANKS

The contribution of the doctors, nurses and 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 10 May 2016 and signed on its behalf:

Mustaq Brey
Chairman
André Meyer
Chief Executive Officer