Positive Outlook for Netcare Despite Economic Challenges

FEBRUARY 3, 2016

Global Credit Ratings (GCR) has affirmed the national scale ratings accorded to Netcare Limited of A(ZA) and A1(ZA) for the long and short term respectively, according a positive outlook. The ratings relate solely to the extent to which Netcare’s local Rand-denominated cash flows cover Rand-denominated debt service and operational obligations.

Patricia Zvarayi, Senior Corporate Analyst at Global Credit Ratings at GCR, says the rating was based on several criteria, including the fact that Netcare’s domestic operations have sustained sound top line growth over the five-year review period.

“Revenue from the South African operations rose by 6% year-on-year to R17.3 billion in F15. With the operating margin widening from 16.8% to 19.7%, operating income rose from R2.2 billion in F11 to R3.4 billion in F15, 50% higher than the R2.2bn reported in F11. Furthermore, Netcare SA reported a robust cash conversion ratio of 105% in F15, compared to 98% in F14.”

Zvarayi says that despite total local borrowings rising to R4.7 billion at FYE15 (FYE14: R3.6 billion), Netcare’s domestic business reports conservative gearing and strong credit risk metrics. Net debt to equity amounted to just 31% at FYE15 and net debt to EBITDA to an unchanged 83%. Furthermore, Netcare’s net interest cover rose markedly to 47.4x in F15, and has remained above 13x from F12.

“Whilst ring-fenced from the domestic business, the successful refinancing of GHG PropCo 1’s debt has allayed market concerns of potential reputational damage and alleviated the strain on Netcare’s management, and is therefore positively viewed. However, the Competition Commission’s Private Healthcare Market Inquiry is still in progress as are discussions regarding the White Paper on National Health Insurance (NHI), both of which add some uncertainty to the local industry” says Zvarayi.

Looking ahead, Zvarayi notes that Netcare’s SA operations will be constrained by several systematic economic challenges. “Inflationary pressures driven by the weak Rand are likely to negatively impact on margin, as the fastest slide in the currency only occurred towards year end 2015, after the period where treatment tariffs would have been negotiated with the medical schemes. Furthermore, the domestic economic weakness and consumer strain that continues to curtail the growth in medical aid membership, with existing members also likely to trade down to cheaper scheme options.”

Nevertheless, Zvarayi concludes: “Netcare SA’s ability to grow revenue and margin despite a sluggish economy and weakening currency would likely lead to upward rating migration. However, much more stringent regulations that exacerbate the impact of these economic challenges, could warrant negative rating action by GCR.”