“I firmly believe that we have the right strategy and people in place to enable us to consistently grow in the future as we have done over so many years.”
Last year I reported on the consistent growth of Mediclinic over the past 30 years, for which we are thankful. However, for the past financial period, the first full year following the Company’s listing on the London Stock Exchange, the Group was unable to deliver its consistent growth in underlying earnings per share achieved in the past, largely due to challenges in our Middle East platform.
Our expansion into Abu Dhabi, effectively doubling the size of the Middle East business following the Al Noor Combination, has not met our original expectations. Our growth forecasts for the Abu Dhabi operations were significantly impacted in the short term due to unforeseen changes in the regulatory environment and a greater need to align Al Noor with the sustainable business and operational practices of the Mediclinic Group. As a result, revenue and underlying EBITDA margins during the year were lower than expected in the Middle East. Despite the challenges in Abu Dhabi, our established Dubai operations continued to perform well. The new Mediclinic City Hospital North Wing opened in the third quarter of the year and patient volumes have been encouraging. I remain confident in our approach to expansion in the region, and that it will deliver the required longer-term growth and returns for the Group.
In Switzerland and Southern Africa, our largest two operating platforms, we have seen good trading performances this year. The key metrics of patient admissions, theatre hours sold and revenue per bed day have all been positive. As I have stated before, this indicates positive trends in patient choice and shows that we are attracting and retaining sufficient doctors to support the business. This enables us to continue to focus on enhancing operational efficiencies. In the UK, our 29.9% investment in Spire Healthcare remained stable and continues to give us exposure to the UK private healthcare market.
Overall, the Group remains in a solid financial position. Group revenue for the year was up 30% at £2 749m (2016: £2 107m) and underlying EBITDA was up 17% at £501m (2016: £428m), both benefiting from the translation effect of weaker Sterling and the addition of the Al Noor business to the Group. However, underlying earnings were flat at £220m (2016: £219m) while underlying earnings per share were down 19% at 29.8 pence (2016: 36.7 pence), both affected by the increase in finance costs and poor performance of the Abu Dhabi business. Earnings per share were further impacted by the effect of additional shares issued for the Spire and Al Noor transactions.
In view of the financial results and following the review last year of the Group’s dividend policy to target a pay-out ratio of 25% to 30% of underlying earnings, the Board recommended a final dividend of 4.70 pence per share, bringing the total payment for the year to 7.90 pence per share.
During the year under review, the clinical performance of the business was satisfactory across all operating platforms, and most patient safety and clinical effectiveness indicators showed improvement. In addition, many initiatives in support of clinical performance and quality improvement were launched and completed during the year. Highlights include:
- the strengthening of clinical services leadership at hospital and corporate level in Mediclinic Southern Africa;
- close collaboration between Mediclinic Southern Africa and supporting doctors in certain disciplines;
- the launch of patient reported outcomes after large joint surgery in Hirslanden;
- progress on the implementation of an integrated care model in Hirslanden;
- the establishment of a comprehensive cancer centre in Mediclinic Middle East; and
- the selection of a new electronic health record system in Mediclinic Middle East.
Much of the progress can be attributed to a strong collaborative effort between the clinical services teams of the respective platforms.
The healthcare industry has always been highly regulated with continuous changes. We have always managed this successfully, thanks to the well-informed and responsible leadership of our management teams. However, this year has been particularly tough in all three of our operating platforms.
In Switzerland, there was the proposed levy in the Canton of Zurich, which the Cantonal Parliament voted not to approve in March 2017. National outpatient tariffs (TARMED) remain under revision and the Federal Government has proposed adjustments as a transitional solution until the healthcare providers and funders agree on a revised tariff structure. The Federal Government is also preparing a framework for the outmigration of services (shift of basic medical treatments from the inpatient to the outpatient sector) across Switzerland.
In Southern Africa, we continue to engage with the South African Competition Commission in relation to the Health Market Inquiry which is undertaking a review of the private healthcare sector to understand whether there are features of the sector that prevent, distort or restrict competition, and how competition in the sector can be promoted. Over the longer term, the government in South Africa is hoping to address the shortcomings of the public healthcare system through the phased introduction of a National Health Insurance system over a 14-year period.
Finally, in the Middle East, we saw the introduction in July 2016 of a 20% co-payment for Thiqa patients (those covered by health insurance for UAE Nationals or others of similar status in Abu Dhabi) using private facilities. This had a material impact on patient volumes and the financial performance of the business in Abu Dhabi. In April 2017, the co-payment in Abu Dhabi was waived with immediate effect.
Board activity and changes
Following the Mediclinic and Al Noor Combination and the Group’s listing on the London Stock Exchange in 2016, I last year reported a number of Board changes. I am pleased to say that the new Board structure operated efficiently throughout the year. We continue to look at how to improve the composition and functioning of the Board.
In April 2016, Jannie Durand, a Non-executive Director of the Company and the Chief Executive Officer of Remgro Limited, our major shareholder, appointed Pieter Uys as his alternate. Since 2013, Pieter has held the position of Head of Strategic Investment at Remgro Limited.
Jurgens Myburgh was appointed as the CFO of the Group on 1 August 2016, replacing Craig Tingle, who retired as announced in 2016. Prior to joining Mediclinic, Jurgens served as CFO at Datatec from June 2014, and before that at The Standard Bank of South Africa as Executive Vice President of Investment Banking, where he was involved in several major Mediclinic corporate transactions. Since joining the Board, Jurgens has made a number of significant contributions to the business.
On 21 February 2017, Ian Tyler, the Company’s Senior Independent Director, resigned as a Director of the Company. Ian was previously Chairman of Al Noor, and we were delighted that he agreed to continue on the Board following the Combination in February 2016. However, Ian is a Board member of several LSE-listed companies and believed that it would be in the best interest of all parties to reduce his responsibilities. I would like to thank Ian for his important contribution to the Board during a very busy year for him. Desmond Smith was appointed as the new Senior Independent Director. He was appointed an Independent Non-executive Director of Mediclinic International Limited in 2008 and was the Lead Independent Director from 2010 until the Al Noor Combination took place.
This year has highlighted, once again, the continued challenges and changing regulatory landscape in which we operate. Competition from the public and private sector means we must focus on continually improving the quality of our services while demonstrating value in the healthcare services we provide to patients, funders and governments alike. Despite these challenges, we operate in an industry where demand continues to grow for our services. The Board remains focused on creating long-term value for stakeholders and maintaining Mediclinic’s leading position in the international healthcare market.
Having the services available of high-quality clinical, operational and support staff is crucial to the long-term success of the business. Furthermore, by closely monitoring key indicators and gathering information, we continue to position the Group for sensible future growth.
Mediclinic has been providing private healthcare services since 1983, and we have always taken a long-term view when we make investment decisions. The fundamentals of the healthcare industry remain positive, and I firmly believe that we have the right people and strategy in place to enable us to consistently grow in the future as we have done over so many years.
Appreciating your continued support
As ever, I want to express my sincere thanks to everyone who contributed to Mediclinic’s continued success, including our Directors, management, doctors, nurses and support staff. In particular, the support of patients and medical professionals is absolutely vital to the sustainability of our business, and we deeply appreciate that they have chosen Mediclinic as their preferred healthcare partner.
Finally, I would like to extend a special thank you to all our shareholders for their confidence in us.
Dr Edwin Hertzog