Life Healthcare seems to be the preferred stock among SA’s listed hospital groups with both Allan Gray and Perpetua naming it among their favoured picks in a sector that has plenty of scope for recovery as the world slowly extricates itself from the grip of the Covid-19 pandemic.
The proven lost-cost operator is now SA’s second-biggest private hospital group with 9,136 registered beds and a diversified income stream that includes an extensive presence in Western Europe via its stake in Alliance Medical Group (AMG), which brings in almost a third of its revenue. While Life Healthcare’s share price is only down a marginal 2.64% since the start of 2020, having recovered strongly from the sharp sell-off in the midst of the Covid-19 market turmoil last year, analysts believe it is still undervalued given its strong fundamentals.
“We think that in an SA market where employment and medical aid membership is stagnating and people are moving to lower cost network plans, Life Healthcare is well positioned to win,” says Jithen Pillay, an investment analyst at Allan Gray. “Life Healthcare is our clients’ largest exposure across the hospital groups.”
SA’s listed hospital groups have seen their share prices suffer since the onset of the pandemic, which upended the previously held belief that healthcare providers were among the best defensive investments in times of turmoil as demand for medical services is typically regarded as a certainty. However, the widespread cancellation or postponement of elective surgeries and routine medical screenings in the midst of Covid-19 has prompted a radical rethink of that long-held assumption.
“When Covid-19 first appeared, one would have thought it would benefit the hospital groups, but in fact the opposite was true,” said Pillay. “While you get an uptick in revenue from Covid-19 admissions, you lose much more from the decline in elective surgeries and non-urgent cases as people are fearful of going to hospitals.”
Perpetua’s Delphine Govender estimates that Life Healthcare lost about R2bn due to the cancellation or postponement of elective procedures and routine screening as the Covid-19 pandemic ironically pushed its occupancy levels down to about 50%, from the usual 70%. However, that means the stock has significant scope for recovery as the pandemic begins to wane with SA’s vaccine rollout gradually gaining momentum.
“We should start to see that come through in the next year or two,” said Govender.
However, it is Life Healthcare’s diversification into international markets that the money managers really like as this means the group is not just exposed to the SA economy with all its well-known challenges of sub-par growth, unemployment and political uncertainty.
Key to that is Life Healthcare’s AMG business, which is one of Europe’s leading providers of diagnostic imaging services such as MRI scans, CAT scans and PET-CAT scans. AMG has an established contract with the UK’s National Health Service (NHS) to provide PET-CAT scans, which are used mainly to screen for cancer. It also has a division called Life Molecular Imaging (LMI), which is essentially a research & development company that specialises in the commercialisation of molecular imaging agents used in certain PET-CAT scans.
One such agent is Neuraceq, a radiopharmaceutical tracer used during the molecular scanning process to identify amyloid plaques in the brain that are associated with Alzheimer’s. Neuraceq is one of only three such tracers approved by the US Food and Drug Administration.
“While a lot must still happen before it would be prudent to assign a big value to Neuraceq, we believe Life Healthcare is a cheap share even without Neuraceq,” said Pillay, adding that one has to factor in Life Healthcare’s ability to convert more than 80% of its earnings into free cash flow.
He also argues that the group has made good capital allocation decisions in recent years by selling underperforming businesses in India and Poland. With its combination of a low-cost hospital offering in its core SA market coupled with its diagnostic imaging services in Europe, a region with a well developed medical system and an ageing demographic, the stock seems perfectly positioned to capitalise on a post-pandemic recovery.
“Overall we think the economics of Life Healthcare are attractive,” said Pillay. “Assuming earnings recover post Covid-19, you’re not paying a lot for that.”
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