Michael Flemming

While Europe is burning the bottom line, emerging markets are where opportunities are.

Executive directors of private hospital group Netcare spent a considerable amount of time at the group's 2012 annual results presentation last week reassuring its SA shareholders that the group wouldn't make a rights issue to refinance its £1,5bn UK debt.

With the October 2013 maturing deadline approaching, the group is under pressure to find a solution or face the prospect of having to hand over the title deeds for its UK hospitals to its creditors.

CEO Richard Friedland won't discuss in public the options it's considering.

Though the loan is ring-fenced and SA shareholders are not liable for the debt, the uncertainty around the group's ability to meet the settlement deadline prompted Netcare to write down R10,7bn of the value of its UK business, General Healthcare Group (GHG), in the year to September.

Like its competitor Mediclinic, Netcare has once again had to justify its expansion into the European markets.

The groups ventured into Europe six years ago, taking on extensive debt to buy the assets when the markets were bullish. The offshore expansion was prompted by concerns that the SA market was becoming saturated.

Netcare took a 50,1% stake in a consortium that acquired UK's private hospital network GHG in 2006 for £2,2bn. Mediclinic acquired Switzerland's largest private hospital group, Hirslanden, for SwFr2,54bn in 2007. The group (Mediclinic) has since ventured into the United Arab Emirates, where it holds a 50,4% stake in Emirates Healthcare.

Then the recession came. The prolonged economic slump in the European markets has not only dashed the group's hopes of getting superior returns from these investments, but has also made it hard for them to repay the loans.

Mediclinic had to return to the markets (for the third time) in August to raise funds to refinance its R24bn debt in Switzerland. But that option is out of the question for Netcare because of the provision that excludes the SA business from any recourse regarding the debt, which was one of the conditions the SA Reserve Bank attached in permitting Netcare to buy GHG.

William Meyer, CEO of Fenestra Asset Management, says the problem with refinancing debt with a rights issue is that it takes the company backwards in terms of the returns investors are expecting.

"After a rights issue, you need to have a compound growth rate of 100% to get back to where you started. But that's not possible for a hospital group."

He says Netcare will struggle to refinance the loan, given the economic slowdown in Europe - a situation he believes will further frustrate shareholders who have been waiting to start seeing returns from the UK investment.

Paul Theron, MD of Vestact, says it will take a while before Mediclinic and Netcare see much growth in their European businesses.

Life Healthcare, which returned to the JSE two years ago, seems to have benefited handsomely from this gloom. It previously traded as Afrox Healthcare.

The company's business is largely in Southern Africa, and therefore not exposed to the difficult European conditions.

Since returning to the JSE, its share has surged from the listing price of R13,50 - after it was forced to reduce its target of between R14 and R17 because of low demand - to as high as R35 before stabilising at the current R32.

The group's 2012 annual results to September were an early Christmas gift to investors. At R2,5bn, operating profit was up 17% while EPS grew 16,4% to 144c. Its strong cash position enabled it to raise the total dividend from 85c/share to 105c/share.

The group has done fairly well in delivering on the promises it made at the time of listing. In a bullish scenario, it said it would grow its bed capacity by 14% and its earnings by up to 18% annually.

CEO Michael Flemming reports that Life has added 982 beds against its target of 1100 over a four-year period. It's now looking to add another 1000 to its network of 8227 beds over the next four years.

Its profit margin has widened to 26%; there were suggestions that the 24,2% it achieved prior to listing wasn't sustainable.

Moreover, it took its first step offshore when it acquired a 26% stake in Indian private hospital group Max Healthcare.

"We've shown consistent performance in what we said we were going to deliver," says Flemming.

Meyer says, at the moment, emerging markets are where the opportunities are.

Flemming says the group is hoping to generate 25% of its revenue from India over the next five years. He's also intensifying his search for acquisitions across the African continent, which should account for another 25%. In this bullish scenario, SA would contribute around 45% to revenue. That would help it diversify its revenue sources and risk.

What it means:

Turnaround in Europe could take a long time

Growth is in emerging markets