Johannesburg, 31 January 2019 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Netcare Limited at A+(ZA) and A1+(ZA) for the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Netcare Limited (“Netcare”) based on the following key criteria:
The ratings reflect Netcare’s strong competitive position as one of the three largest private healthcare groups in South Africa. This is supported by its strong brand and scope of operations across the country that provides relative insulation against adverse developments of any particular hospital or specialisation. GCR expects that Netcare’s continued investments in its service offerings and IT will drive operational and competitive improvements over time.
The ratings also factor in the defensive nature of the sectors’ fundamentals across economic cycles. Counterbalancing risks include uncertain regulatory developments, which could pose downside risk, and in particular Netcare’s high payor dependency on insured medical scheme members.
Netcare has sustained a stable operating performance track record. Operating profitability has been largely consistent over the past five years, although EBITDA and operating margins have recently softened somewhat, registering at 20.3% and 16.8% respectively at FY18 (FY14: 22.1%; 19%). While patient volume growth is anticipated to remain under pressure in the current challenging environment, strategies focused on improving occupancy levels and the case mix towards rising demand services is expected to continue to support strong profitability levels over the rating horizon.
Netcare continues to report conservative leverage metrics, with net debt to EBITDA registering at 114% (FY17: 98%), whilst robust cash flows support strong debt serviceability ratios. Free cash flow to net debt remained steady at 47%, whilst net interest cover equated to 8.9x at FY18 (FY17: 9.8x). Ratios are also well within bank covenant requirements.
Liquidity is sound, supported by undrawn committed bank facilities of R2bn, as well as cash on hand of R1.4bn as at year-end FY18 and proven strong cash generation capabilities (FY18 102% cash conversion ratio). This is considered sufficient in view of upcoming debt maturities, manageable capex spend and shareholder friendly financial policies.
For the purposes of the ratings, GCR’s analysis has always focused on the credit risk profile of Netcare’s South African operations on a standalone basis. Nevertheless, the recent UK disinvestment is noted in that while it narrows the group’s geographic diversity, it eliminates the persistent uncertainty that the UK operations introduced and any potential risk of cash flow leakage from South Africa. While the net result in FY17 and FY18 have been skewed by non-cash impairments and adjustments on account of the deconsolidation of the UK operations these will not recur.
Netcare’s ratings could benefit from its ability to gain market share and demonstrate continued revenue and earnings growth, as well as improved diversification. Conversely, a material weakening in performance, and/or higher gearing could pressure the ratings. Significant industry-wide reimbursement or regulatory challenges could also bode negatively.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (January 2001)|
|Long term: A-(ZA)
Short term: A1-(ZA)
Last rating (January 2018)
|Long term: A+(ZA)
Short term: A1+(ZA)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Netcare rating reports, 2001-18
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents arising from operating, investing and financing activities.|
|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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on context. In the widest sense, it means the difference between two values.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; d.) the validity of the ratings 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 ratings have been disclosed to Netcare Limited.
The information received from Netcare Limited and other reliable third parties to accord the credit ratings included:
• the Integrated Report for the year to 30 September 2018, as well as for the preceding four years;
• financial statements for the South African operations for FY14-FY17;
• results booklets and presentations for 2018;
• debt schedule for at FY18.
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 at A+(ZA); Outlook Stable.