Netcare reported interim results to 31 March 2021 (1H21) on 24 May, with Group revenue rising 24% YoY to R10.08bn, while adjusted headline EPS came in at ZAc27.3 (-61.9% YoY). Netcare said that the second COVID-19 wave had negatively impacted its results for the period under review. Profit before tax jumped 165.2% vs 2H20 but decreased by 60.9% YoY to R542mn. Until the pandemic hit, Netcare was a large returner of cash to shareholders via dividends and share buybacks but it did not declare an interim dividend and at the results presentation, CEO Dr. Richard Friedland said Netcare will “only resume dividend payments once the operating environment stabilises.” Still, we anticipate that, at some point over the medium term, the company will once again pay out the majority of its free cash flow to shareholders and thus, at the right price, it can make for a good cash return story.
Figure 1: Netcare 1H21 results overview, in Rbn unless otherwise indicated
Source: Anchor, Company data
Some salient points from these results include:
Figure 2: Netcare – the percentage of beds dedicated to COVID-19 patients, June 2020 to May 2021
Source: Netcare
Conclusion
The share currently looks cheap vs normalised (e.g., FY19) earnings and cash flows and it is currently trading at 8.5x 2019 adjusted HEPS and a 7.6% dividend yield on 2019’s dividend. However, despite this apparent cheapness, we are cautious about Netcare’s growth outlook in a normalised environment. Netcare also estimates that c. R80mn of additional COVID-19 operating costs will be permanent (a 0.4% impact on margins), while we expect revenue growth in normalised times to be tepid due to muted growth in South Africa’s insured population and pricing pressure from the major medical insurers.
We value the share at c. R13.70/share by applying an 11x multiple to an estimate of normalised free cash flow (R2.2bn) to get a R24bn enterprise value (EV) and subtracting the R6bn net debt to get R18bn in equity value or around R13.70/share (we note that the share closed at R15.00 on 26 May). We do not believe that there is currently substantial downside to the share, but we would also not be buyers due to the headwinds Netcare currently faces (as we discussed above).