Announcements

GCR affirms Netcare Limited’s* rating of A(ZA); Outlook Positive

Johannesburg, 28 Jan 2016 — Global Credit Ratings has today affirmed the national scale ratings assigned to Netcare Limited of A(ZA) and A1(ZA) for the long and short term respectively; with the outlook accorded as Positive.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Netcare Limited* (“Netcare”) based on the following key criteria:

Netcare’s domestic operations (“designated hereafter as Netcare SA”) have sustained sound top line growth over the five-year review period, with revenue rising by 6% YoY to R17.3bn in F15. This has filtered through to earnings, with operating income having risen from R2.2bn in F11 to R3.4bn in F15 (F14: R3.1bn), and the operating margin widening from 16.8% to 19.7% over the same timeframe. Strong earnings have supported sound cash flows, with operating cash flow reaching a record R2.9bn in F15 (F14: R2.5bn) and Netcare SA reporting a robust cash conversion ratio of 105% (F14: 98%).

Despite the fact that gross borrowings rose to R4.7bn at FYE15 (FYE14: R3.6bn), Netcare SA reports very comfortable gearing and strong credit risk metrics. In this regard, net debt to equity amounted to just 31% at FYE15 (FYE14: 32%) and net debt to EBITDA to an unchanged 83%. Albeit sound, operating cash flow covered total debt by a moderately lower 61% at FYE15 (FYE14: 69%). Net interest cover rose markedly to 47.4x in F15, having registered above 13x from F12. Gross interest cover, on the other hand, was relatively stable YoY, registering at a comfortable 9.7x in F15 (F14: 9.5x).

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 domestic Competition Commission’s Private Healthcare Market Inquiry is still ongoing, with completion only expected at the end of 2016.

Looking ahead, Netcare’s SA operations will be constrained by several systematic economic challenges, especially inflationary pressures driven by the weak Rand and rising utility costs, as well as the global economic weakness and consumer strain that continues to curtail the growth in medical aid membership (amongst others).

Upward rating pressure may arise from Netcare SA’s ability to grow revenue and margin despite a sluggish economy and weakening currency. Conversely, materially adverse regulatory developments would exacerbate the impact of these economic challenges, and could warrant negative rating action.

*For the purposes of these ratings, GCR has focused on the extent to which Netcare’s local Rand-denominated cash flows cover Rand-denominated debt service and operational obligations.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (January 2001)    
Long term: A-(ZA); Short term: A1-(ZA)    
Outlook: Stable    
     
Last rating (January 2015)    
Long term: A(ZA); Short term: A1(ZA)  
Outlook: Positive    
     

ANALYTICAL CONTACTS

Primary Analyst    
Patricia Zvarayi    
Senior Credit Analyst    
(011) 784-1771    
Patricia@globalratings.net    
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate Ratings    
(011) 784-1771    
Shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for rating corporate entities, updated February 2015

Netcare rating reports, 2001-2015

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Cash Flow The inflow and outflow of cash and cash equivalents arising from operating, investing and financing activities.
Competition Commission A regulator that seeks to prevent monopolies and anti-competitive activities by scrutinising company behaviour for potential collusion and the impact of mergers and acquisitions.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
EBITDA EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Margin A term whose meaning depends on context. In the widest sense, it means the difference between two values.
National Scale Rating The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Refinancing The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Netcare Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Netcare Limited with no contestation of the rating.

The information received from Netcare Limited and other reliable third parties to accord the credit rating included:

  • the Integrated Report for 2014/2015, as well as for the preceding four years;
  • financial statements for the South African operations for 2014/2015, as well as for the preceding four years; and
  • results booklets and presentations for 2014/2015, and preceding financial years.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

GCR affirms Netcare Limited’s* rating of A(ZA); Outlook Positive

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