Johannesburg, 24 Jan 2017 — Global Credit Ratings has today upgraded the national scale Issuer ratings assigned to Netcare Limited to A+(ZA) and A1+(ZA) for the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Netcare Limited* (“Netcare”) based on the following key criteria:
The upgrade reflects sustained performance by Netcare’s domestic operations (“designated hereafter as Netcare SA”) amidst protracted economic weakness. While GCR notes the resilient baseline demand for private healthcare, the progression of Netcare SA’s ratings is based on prioritisation of investment in state-of-the-art equipment and procedures, expanding facility capacity and the ambit of high-acuity offerings, entrenched partnerships with highly skilled healthcare professionals, as well as the unlocking of efficiencies in its hospital and primary care offerings.
The ratings focus on Netcare’s local businesses, albeit stabilisation of its UK operations in an evolving regulatory and business landscape is also evidence of sound strategic execution, and is positively viewed. GCR notes in this regard the heads of agreement reached in October 2016 to extend property leases and potentially reduce rentals, and the planned refinance of debt facilities, which currently mature in March 2018.
Netcare SA’s revenues advanced at a five-year CAGR of 7%, rising by 10% to R19bn in F16. New hospitals supported a 4.7% rise in patient days, and despite initially diluting interim occupancy levels to 64.4%, helped to pick up the annual ratio to 67.2%, approximating the F15 level. A modest shift from higher yield surgical cases to medical admissions and higher cost versus price inflation saw further moderation in EBIT margin to 18.7% (F15: 19.7%). That said, margins are still deemed to be robust, being sustained by strict cost rigour, including tight staffing and procurement controls, automation of administrative processes, and investment in greening initiatives. Overall, EBIT rose by 4% YoY to a high of R3.5bn, which after accounting for a modest finance charge, equity accounted earnings, and a moderately lower effective tax rate (inter alia), supported attributable earnings of R2.5bn (F15: R2.4bn).
Strong earnings and strict oversight of the cash conversion cycle have supported a five-year CAGR in operating cash flow of 13% to R2.9bn in F16. Accordingly, the R6.9bn spent on acquisitions and other capex in the past five years has largely been funded from internal reserves. Netcare continues to invest in product and quality differentiation, and for F17 this includes c.R1.7bn to be spent on oncology, day clinics, sub-acutes and brownfields capacity expansion. Management is also mooting a bolt-on acquisition, which if approved, will underpin Netcare SA’s development of a comprehensive mental healthcare offering.
Domestic debt has been managed within a narrow range, registering at R4.5bn at FYE16 (FYE15: R4.7bn). As such, credit protection factors remain very conservative, with net gearing at a stable 31% and net debt to EBITDA at 87% (FYE15: 83%). Discretionary cash flows have trended well above 60% of net debt in the past three years, while net interest paid has consumed on average, 5% of cash generated over the same period. Looking ahead, gearing is not expected to increase materially, while adherence to covenants should remain comfortable.
A further ratings upgrade is unlikely in the short to medium term. Nevertheless, over the longer term, an upgrade could arise from the proven ability to leverage ongoing investment into high yielding offerings and expanding capacity, sustaining strong revenues and free cash flows despite continued socio-economic uncertainties. Conversely, much higher gearing, even to fund strategic capex, would warrant a downgrade. Protracted weakening in performance, due to mounting inflationary pressure, adverse regulatory changes or continued consumer weakness, would also bode negatively.
*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)|
|Last rating (January 2016)|
|Long term: A(ZA); Short term: A1(ZA)|
|Senior Credit Analyst|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Netcare rating reports, 2001-2016
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|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 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; and 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 rating/s has been disclosed to Netcare Limited with no contestation of the ratings.
The information received from Netcare Limited and other reliable third parties to accord the credit rating included:
- the Integrated Report for the year to 30 September 2016, as well as for the preceding four years;
- financial statements for the South African operations for 2016, as well as for the preceding four years; and
results booklets and presentations for 2016, 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 upgrades Netcare Limited’s* rating to A+(ZA); Outlook Stable.