Life Healthcare | Scanning the horizon for opportunities

Life Healthcare's offshore expansion has been poor in India (sold out to KKR at a ZAR 1bn profit) and Poland (we estimate ZAR 1.5bn write-down of fair value). Alliance Medical operates in the UK and derives the majority of its income from NHS contracts which expire in c.2025 to 2027. LHC is trying to transition its Alliance Medical business model to SA by expanding into the SA radiology market. However, we have reservations looking at the experience set of Mediclinic (MEI) when they applied to the SA Competition Commission (CC) to acquire Matlosana Medical Health Services and Netcare (NTC) when they bought Akeso.

1. The CC blocked MEI's application to acquire Matlosana Medical Health Services in Klerksdorp. MEI has since appealed the CC's decision to disallow the acquisition.

2. Netcare sold two acute hospitals to satisfy the CC.

In our view, LHC may have to make a similar sacrifice to NTC if it were to enter the SA radiology space. Furthermore, we consider the returns from existing SA acute assets as superior to the risk/return profile of moving into SA radiology. Following the results, we have revised our earnings forecasts as follows (all ZARc per share):

• FY ‘20f: -2% from 155 to 152,
• FY ‘21f: -2% from 171 to 168, and
• FY ‘22f: first disclosure, 191.

We estimate that the counter is trading at a 16.21x rolled forward PE (1.46x PE relative). Our combined DCF, EV/EBITDA and P/E valuation methodology deliver a one-year target price of R28.26/share, implying a total return of 17.1%. The total return is 1.4% greater than our estimated market return of 15.7%. Accordingly, we retain a MARKET PERFORM rating.