Announcements Corporate Rating Alerts

GCR Revises Long Term National Scale Issuer Rating on Netcare to AA-(ZA) on Criteria Change. Outlook Stable

Rating Action

Johannesburg, 11 October 2019 – GCR Ratings (“GCR”) has revised the Long term national scale Issuer rating assigned to Netcare Limited (“Netcare”, “the group”) to AA-(ZA), from A+(ZA) and affirmed the Short term national scale Issuer rating at A1+(ZA); with a Stable Outlook.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

Netcare Limited

Issuer Long Term

National

AA-(ZA)

Stable outlook

Issuer Short Term

National

A1+(ZA)

GCR announced that it had released new criteria for rating corporate companies in May 2019. Consequently, the ratings for Netcare were placed ‘Under Criteria Observation’. GCR has finalised the review under the Criteria for Rating Corporate Companies, May 2019. As a result, the ratings have been reviewed in line with the new methodology, and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The ratings on Netcare balance the group’s modest leverage profile, alongside its strong domestic market position (albeit geographically concentrated), business line diversification and sound earnings.

GCR considers the group’s conservative capital structure to be a primary credit strength. Net debt to EBITDA registered at 147% at 1H FY19 (FY18: 114%), well below bank covenant requirements and stated internal targets of less than 2x. GCR views positively management’s commitment to keep gearing in line with the latter policy, even adjusting debt for the inclusion of operating leases. Cash generation capabilities remain robust, thus supporting strong cash flow to debt ratios and interest serviceability.

The group’s liquidity is viewed as a slight weakness due to the constant need for capex and high dividend payouts, despite manageable debt maturities. Thus, on a uses vs sources basis, including availability under its committed bank facilities of R2bn, cash on hand of R1.3bn and positive free cash flows, coverage is slightly restrained over a two year horizon.

Netcare’s strong market position as one of the three largest private healthcare groups in South Africa (which collectively dominate the sector) is considered a positive rating factor. This is supported by its strong brand and large scope of operations across the country that provides relative insulation against adverse developments of any particular hospital or specialisation. The group operates 56 hospitals and offers a range of acute and primary care services, from specialised cancer treatments through to dental and day clinics, as well as emergency and renal care services. Netcare is also viewed to derive a particular advantage in the mental healthcare space (12 facilities), whilst recent investments in enhancing clinical consolidation through digitisation is expected to drive efficiency improvements over time. Compared to top tier South African peers, however, the group is concentrated geographically, with the ratings anchored on the operating environment of South Africa. This takes into account the weak economic climate and downside risks given increasing regulatory scrutiny, counterbalanced by the defensive nature of the sectors’ demand fundamentals. See sector report published, October 2019 (https://gcrratings.com/wp-content/uploads/2019/10/SectorRisk-publication-Oct-2019).

Over the last five years, Netcare’s operating performance has been solid despite a challenging operating environment. The EBITDA margin has largely remained consistent, registering at 20% at 1H FY19 from 22% at FY14, aligning with top tier industry peers. While revenues and EBITDA margins are likely to continue to be pressurised, as a result of slow acute inpatient trends and changes in the case mix, GCR is of the opinion that the group will continue to report strong profitability levels over the rating horizon. That said, GCR does note that Netcare’s high payor dependency on insured medical scheme members remains a significant risk to earnings, in terms of patient volumes and reimbursements.

Outlook Statement

The Outlook is Stable, balancing the weakened operating environment with GCR’s opinions on continued sound cash generation, as well as stable funding and liquidity.

Rating Triggers

GCR views an upgrade in the ratings to be unlikely over the outlook horizon, however, improvements in liquidity and/or gearing could be viewed favourably. The ratings could be pressured by a material weakening in performance, higher gearing above management’s stated policy limits or if regulatory concerns worsen beyond GCR’s expectations.

Analytical Contacts

Primary analyst

Sheri Morgan

Senior credit analyst

Johannesburg, ZA

morgan@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Sector Head: Financial Institutions Ratings

Johannesburg, ZA

matthewp@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Corporate Companies, May 2019

GCR Country Risk Scores, June 2019

GCR Corporate Sector Risk Scores, October 2019

GCR Research on the South African Private Healthcare Sector, October 2019

Ratings History

Netcare Limited

Rating class

Review

Rating scale

Rating class

Outlook

Date

Issuer Long Term

Initial

National

A-(ZA)

Stable

January 2001

Last

National

A+(ZA)

Stable

January 2019

Issuer Short Term

Initial

National

A1-(ZA)

January 2001

Last

National

A1+(ZA)

January 2019

RISK SCORE SUMMARY

Risk score

16.50

 

 

Operating environment

14.50

Country risk score

7.50

Sector risk score

7.00

 

 

Business profile

0.50

Competitive position

0.50

Management and governance

0.00

 

 

Financial profile

1.50

Earnings performance

0.00

Leverage and capital structure

2.00

Liquidity

-0.50

 

 

Comparative profile

0.00

Group support

0.00

Peer analysis

0.00

 

Glossary

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Cash

Funds that can be readily spent or used to meet current obligations.

Covenant

A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.

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 exposures 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.

Dividend

The portion of a company’s after-tax earnings that is distributed to shareholders.

Environment

The surroundings or conditions in which an entity operates (Economic, Financial, Natural).

Gearing

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 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.

Issuer

The party indebted or the person making repayments for its borrowings.

Leverage

With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.

Liquidity

The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 

Long Term Rating

See GCR Rating Scales, Symbols and Definitions.

Margin

A term whose meaning depends on the context. In the widest sense, it means the difference between two values.

Rating Horizon

The rating outlook period

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

SALIENT POINTS 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.

The credit rating has been disclosed to Netcare Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

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

  • The unaudited interim results for March 2019;
  • The audited financial results for September 2018, plus four years of comparative audited numbers;
  • Industry presentations;
  • Detailed facility and maturity breakdown at July 2019


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