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MDC
MDC
Medi-Clinic - Unaudited interim group results for the six months ended 30
September 2006
MEDI-CLINIC CORPORATION LIMITED
Reg. No. 1983/010725/06
Share code: MDC
ISIN-code: ZAE000074142
("Medi-Clinic" - Incorporated in the Republic of South Africa)
INTERIM REPORT
Unaudited interim group results of Medi-Clinic Corporation Limited for the six
months ended 30 September 2006
HIGHLIGHTS
Growth in revenue: 14%
Increase in operating profit: 15%
Core earnings per share diluted due to:
* Capital restructuring
* Release of BEE shares from treasury stock
Capital restructuring resulted in increased ROE
CONSOLIDATED INCOME STATEMENT
Unaudited Unaudited Audited
6 months to Increase 6 months to Year to
30/09/06 % 30/09/05 31/03/06
R"m R"m R"m
Revenue 2,605 14 2,278 4,723
Cost of sales (1,431) (1,258) (2,571)
Administration and
other operating
expenses (629) (548) (1,165)
Operating profit before
depreciation (EBITDA) 545 15 472 987
Depreciation (67) (56) (124)
BEE Share-based payment
- - (85)
Profit on sale of
equipment - - 1
Operating profit 478 15 416 779
Income from associates
- 13 13
Profit on sale of
associate - - 43
Finance income 22 39 70
Finance cost (44) (12) (45)
Profit before taxation
456 456 860
Taxation (133) (133) (428)
Profit for the period
323 323 432
Attributable to:
Shareholders of the
company 272 276 338
Minority interests
51 47 94
323 323 432
Earnings per ordinary
share
- cents
Basic 76.2 (5) 80.4 97.1
Diluted 69.0 79.3 85.9
Headline earnings per
ordinary share
- cents
Basic 76.2 (5) 80.3 86.3
Diluted 69.0 79.2 76.3
Core earnings per
ordinary share - cents
Basic 76.2 (5) 80.3 159.3
Diluted 69.0 79.2 140.9
Earnings reconciliation
Profit attributable to
shareholders 272 276 338
Profit on sale of
equipment - - (1)
After tax profit on
sale of associate - - (37)
Headline earnings
272 (1) 276 300
Net STC charge on
special dividend - - 168
BEE share-based payment
- - 85
Core earnings 272 (1) 276 553
CONSOLIDATED BALANCE SHEET
Unaudited Unaudited Audited
30/09/06 30/09/05 31/03/06
R"m R"m R"m
Assets
Non-current assets
2,685 2,350 2,617
Property, plant and
equipment 2,445 2,105 2,327
Intangible assets
48 48 48
Investments - unlisted
72 109 119
Deferred income tax
assets 120 88 123
Current assets 1,122 1,617 980
Inventories 158 140 153
Trade and other
receivables 606 496 667
Cash and cash
equivalents 358 981 160
Total assets 3,807 3,967 3,597
Equity and liabilities
Total equity 2,115 3,125 1,931
Share capital and
reserves 1,799 2,868 1,641
Minority interests
316 257 290
Total liabilities
1,692 842 1,666
Long-term interest-
bearing borrowings 810 145 848
Retirement benefit
obligations 116 82 102
Deferred income tax
liabilities 5 4 5
Short-term interest-
bearing borrowings 76 51 74
Short-term interest-
free borrowings 685 560 637
Total equity and
liabilities 3,807 3,967 3,597
Number of ordinary
shares ("000) 357,910 344,659 356,231
Weighted number of
ordinary shares ("000) 356,832 343,817 347,140
Diluted number of
ordinary shares ("000) 394,320 348,432 392,417
Net asset value per
ordinary share - cents 503 832 461
Directors" valuation of
unlisted investments 72 142 119
STATEMENT OF CHANGES IN EQUITY
Unaudited Unaudited Audited
6 months to 6 months to Year to
30/09/06 30/09/05 31/03/06
R"m R"m R"m
Opening balance 1,931 2,928 2,928
Net shares issued
- - 3
Distributed to
shareholders (122) (109) (1,493)
Distributed to
minorities (25) (24) (39)
Profit for the period
323 323 432
Movement in shares held
in treasury 4 6 17
Movement in share-based
payment reserve 4 1 90
Share issue costs
- - (7)
2,115 3,125 1,931
CONSOLIDATED CASH FLOW STATEMENT
Unaudited Unaudited Audited
6 months to 6 months to Year to
30/09/06 30/09/05 31/03/06
R"m R"m R"m
Cash flow from
operating activities 515 455 571
Cash generated from
operations 696 562 994
Net finance
(cost)/income (22) 27 25
Taxation paid (159) (134) (448)
Cash flow from
investment activities (138) (151) (388)
Cash flow from
financing activities (175) (140) (830)
Distributions to
shareholders (122) (109) (1,493)
Distributions to
minorities (25) (24) (39)
Movement in borrowings
(32) (13) 689
Other 4 6 13
Net movement in cash,
cash equivalents and 202 164 (647)
bank overdrafts
Opening balance of
cash, cash equivalents 149 796 796
and bank overdrafts
Closing balance of
cash, cash equivalents 351 960 149
and bank overdrafts
Cash and cash
equivalents 358 981 160
Bank overdrafts (7) (21) (11)
351 960 149
COMMENTARY
We are pleased to report that the group has maintained its consistent growth
pattern. It strengthened its operational performance and continued to
implement strategic initiatives and investments aimed at expanding the group"s
operations in South Africa and other countries.
FINANCIAL PERFORMANCE
Shareholders are referred to the circular dated 1 November 2005 presenting
details of the black ownership initiative and the capital restructuring
implemented by Medi-Clinic in 2005 ("the transactions"), as well as the
trading statement, dated 19 April 2006, setting out, inter alia, the
accounting treatment of the black ownership initiative.
The transactions have a non-recurring as well as an ongoing financial effect
on the group"s earnings, EPS and HEPS. The non-recurring effect of the
transactions manifests in the following two charges to the group"s income
statement: a net STC charge of R168 million ("the STC charge") resulting from
the special dividend declared as part of the capital restructuring as well as
a charge of R85 million being the IFRS charge on the share-based portion of
the black ownership initiative ("the BEE share-based payment"). These charges
were fully reflected in the financial results for the year to 31 March 2006.
The ongoing effect of the transactions is mainly reflected in:
* higher interest charges payable by the group ("the higher interest charges")
as a result of the capital restructuring which was implemented on 27 December
2005. The higher interest charges consist of the aggregate of the interest
income foregone on the cash balance on hand prior to the capital restructuring
and the interest paid on the newly introduced debt of R700 million. Compared
with the previous six months the higher interest charges for the six months
under review amount to about R61 million before taxation; and
* the 28,5 million new shares issued to the strategic black partners in terms
of the black ownership initiative. These shares are treated as treasury stock
and are being released in line with payments made to Medi-Clinic by the
strategic black partners relative to the original market value of these
shares, being R525 million. To date 10,5 million of these shares have been
released from treasury stock (0,9 million during the period under review).
This leaves a balance of 18,0 million treasury shares at 30 September 2006 in
addition to the existing treasury shares held by the group and the 15,8
million shares issued to the Mpilo Trust. The release of such shares from
treasury stock has had and will continue to have a commensurate dilutive
effect on the EPS and HEPS of the group.
In this report the core earnings of the group are emphasised. The core
earnings include the headline earnings of the group and the ongoing effect of
the transactions, but exclude the non-recurring effect of the STC charge and
the BEE share-based payment.
The transactions did not have a significant financial effect on the
operational performance of the group.
With the above as background, revenue, which consists mainly of hospital fees
levied, increased by 14% to R2 605 million (2005: R2 278 million) for the six
months under review. Operating income before interest, taxation, depreciation
and amortisation ("EBITDA") was 15% higher at R545 million (2005: R472
million). After incurring the higher interest charges of about R61 million,
core earnings declined by 1% to R272 million (2005: R276 million) resulting in
a decrease of 5% in core earnings per ordinary share to 76,2 cents (2005: 80,3
cents). The interim dividend per ordinary share was maintained at 16,5 cents.
BUSINESS PERFORMANCE
The group acquired a 49,9% interest in the 190 bed Wits Donald Gordon Medical
Centre as well as 100% in the 137 bed Legae Private Hospital effective from 1
July 2005 and 1 December 2005, respectively. The current period"s results are
therefore not directly comparable with those of the previous period.
Excluding this increase in capacity, the group"s revenue growth amounted to
11%.
The revenue growth of 11% was achieved through a 5% increase in bed-days sold,
a 5% increase in the average income per bed-day and a 1% change in the profile
of patients treated. The increase in utilisation was evident in both surgical
and medical cases. The number of patients admitted increased by 3% while the
average length of stay increased slightly mainly due to an increase in the
average length of stay of medical cases.
The group"s EBITDA margin increased from 20,7% to 20,9% due to improved
operational efficiencies.
Cash flow continued to be strong during the period under review, mainly due to
more efficient working capital management. The group converted 128% (2005:
119%) of EBITDA into cash generated from operating activities. Cash and cash
equivalents increased to R358 million from R160 million at 31 March 2006 after
financing capital expenditure and investments. Interest bearing borrowings
decreased from R922 million at 31 March 2006 to R886 million resulting in a
strengthening of the interest bearing borrowings to equity ratio from 48% to
42%. The group"s strong cash flow continues to underline the quality of its
earnings.
Comparing the balance sheet at 30 September 2006 to the balance sheet at 30
September 2005, the result of the capital restructuring is clear. The
interest bearing borrowings to equity ratio increased from 6% to 42% with a
concomitant increase in the return (core earnings) on shareholders" equity
from 19% to 30%.
Capital expenditure for the period under review was R185 million (2005: R144
million). Capital commitments (including amounts approved but not yet
contracted for) amounted to R312 million (2005: R373 million).
UNITED ARAB EMIRATES ("UAE")
The group announced on 28 April 2006 that it had entered into an agreement to
acquire a 49% interest in Emirates Healthcare Holdings Limited ("Emirates
Healthcare") for US$46,4 million. Emirates Healthcare is the ultimate holding
company of the healthcare interests of the Varkey Group, a private healthcare
group based in Dubai, UAE that owns and operates the 120-bed Welcare Hospital,
currently the largest private hospital in Dubai, along with one ambulatory
care centre and two clinics close by. It also has the rights to develop two
new hospitals (approximately 400 beds) in the free zone area called Dubai
Healthcare City and plans to develop a further five related clinics. These
projects will be funded by the equity capital to be injected at the
implementation of the transaction plus debt at a projected gearing ratio of
45%. Medi-Clinic"s investment in Emirates Healthcare is not expected to have
a material effect on its earnings in the short term. The construction of the
first hospital, being the 210 bed City Hospital, has commenced and is planned
to be commissioned during the second half of 2007.
The agreement is subject to the fulfilment of several conditions precedent,
inter alia, that the agreed debt funding referred to above be secured. The
date by when the conditions precedent have to be fulfilled has been extended
from 30 June 2006 to 31 December 2006 to allow a realistic time frame for
finalising a number of statutory and financing matters. The funding has now
been approved by the participating banks and the legal documentation and
syndication are in the process of being finalised. It is expected that the
transaction will become unconditional and will be implemented in the near
future.
Shareholders are also referred to paragraph 3.2.5 of the announcement on 28
April 2006 which indicated that the parties will endeavour to secure a further
strategic equity investor to hold an equity interest of approximately 22,75%
in the operating subsidiary of Emirates Healthcare. Medi-Clinic has
subsequently agreed that, in the event that a suitable strategic investor has
not been secured at the time of the implementation of the transaction, Medi-
Clinic will subscribe for cumulative variable rate participating redeemable
convertible preference shares ("the preference shares") in Emirates Healthcare
for about US$28,1 million which will fill the gap in the required
capitalisation of the venture. If a suitable strategic investor is found
within one year of such subscription, the strategic investor will be allowed
to take up the equity and Medi-Clinic will be refunded. If such investor is
not found, the Varkey Group will have an option to buy 51% of the preference
shares. The preference shares will automatically convert into ordinary equity
after three years.
Further opportunities in other countries continue to be investigated.
INDUSTRY MATTERS
The Health Charter
As previously stated, Medi-Clinic supports the formulation of a Healthcare
Charter and plays an active role through the Hospital Association of South
Africa ("HASA") in the drafting of the Charter. It seems that the end of the
process is in sight. The group is grateful that reason prevailed and that the
Charter is essentially in line with the BEE Codes of the Department of Trade
and Industry.
Affordability of Healthcare
Affordability will always remain a critical issue in the healthcare industry
internationally, but especially in developing countries.
Throughout the world increased healthcare costs are driven by increased
utilisation resulting from factors such as the ageing population, new
technology, patient expectations and the increased burden of disease. Locally
the position is exacerbated by a shortage of skilled nursing staff, in line
with the international shortage. This leads to and will for the foreseeable
future continue to lead to sustained pressure for higher nursing salaries.
The private hospital industry recognised the need to place private hospital
costs in proper perspective and to explain the fundamental cost drivers in a
typical private hospital in South Africa. To this end, HASA, of which Medi-
Clinic has always been an active member, commissioned independent research
into the cost drivers and other variable factors influencing private hospital
expenditure. Some of the most significant findings of the first phase of the
research were that private healthcare cost inflation reduced significantly in
the recent past; that private hospitals did absorb costs and did not just pass
all their cost increases on to consumers; and that South African private
hospital inflation was the third lowest of the nine countries selected for the
research. To compare public healthcare costs in South Africa with private
healthcare costs is a futile exercise as the real, all inclusive public
healthcare costs are just not known. The group is convinced that even medical
scheme members in private wings of public hospitals receive substantial
subsidisation by taxpayers: just to a lesser extent than the poor who should
be receiving all the subsidisation.
CHANGE TO THE BOARD OF DIRECTORS
Prof WP Esterhuyse reached retirement age and consequently stood down at the
group"s recent annual general meeting on 27 July 2006, after 14 years of
diligent service on the Board. His calm, wise and well informed contributions
not only at Board level but also at other forums within the group, will be
sincerely missed. Our good wishes accompany him during his retirement.
PROSPECTS
The group expects to continue its track record of consistent growth in
operating profit based on meeting the needs of the market.
The Emirates Healthcare opportunity will require time and operational
resources, but the group is very confident that it will provide an excellent
platform for further growth.
Phodiclinics (Proprietary) Limited ("Phodiclinics"), a company owned 51% by
Medi-Clinic and 49% by Phodiso, acquired the hospitals of the 200 bed
Protector group consisting mainly of the Medivaal MediCentre in
Vanderbijlpark. The Competition Tribunal approved the transaction which will
be implemented during November 2006. Phodiclinics has also been awarded a
license to build a 140 bed hospital in the northern suburbs of the Cape Town
Metropole. The building of this hospital will commence during the next
calendar year.
An extensive upgrade of Panorama Medi-Clinic has commenced as well as the
total reconstruction of the Plettenberg Bay Medi-Clinic. Major upgrades at
Morningside Medi-Clinic and Sandton Medi-Clinic, each involving over R100
million, are nearing completion. Expansions at Durbanville Medi-Clinic and
Pietermaritzburg Medi-Clinic as well as a project at Nelspruit Medi-Clinic
consisting of additional consulting rooms and the upgrade of the original
hospital, are in their final stages. Routine upgrades continue at various
other hospitals. The group will also, as a 49% shareholder, be developing a
70 bed hospital in Scottburgh, KwaZulu-Natal.
Currently it is projected that the number of beds in the group will increase
by about 500 over the next two years resulting from the building of new
hospitals and extensions to existing hospitals.
BASIS OF PREPARATION
The interim financial statements are prepared in accordance with IAS 34 -
Interim Financial Reporting. The accounting policies comply with International
Financial Reporting Standards ("IFRS") and have been applied consistently with
the policies adopted in the previous year.
DIVIDEND TO SHAREHOLDERS
The board of directors declared an interim dividend of 16,5 cents per ordinary
share.
In compliance with the requirements of STRATE, the following dates are
applicable:
Last date to trade cum dividend Friday, 1 December 2006
First date of trading ex dividend Monday, 4 December 2006
Record date Friday, 8 December 2006
Payment date Monday, 11 December 2006
Share certificates may not be dematerialised/rematerialised from Monday, 4
December 2006 to Friday, 8 December 2006, both days inclusive.
Signed on behalf of the board of directors:
E DE LA H HERTZOG LJ ALBERTS
Chairman Managing Director
Stellenbosch, 8 November 2006
Date: 08/11/2006 05:00:53 PM Produced by the JSE SENS Department
