Here’s to your health: Zeroing in on AfroCentric’s growth

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COMPANY ANALYSIS

Here’s to your health: Zeroing in on AfroCentric’s growth

Acquisition-fed healthcare investment group on the up

Chris Gilmour

The strategy for healthcare investment group AfroCentric is one of acquisition. This type of growth path can be an easy one – go shopping and buy what you like. But it can also be a recipe for disaster, especially for the sensitive smaller cap stocks. I sincerely hope that AfroCentric is paying the right price, appropriately funding these acquisitions, and integrating them properly.
In its interim results to December 2017, group CEO Antoine van Buuren noted the several small acquisitions made over the past year. “These are not yet having an influence on the bottom line but are starting to add up and will have a substantial impact over the medium term.”
The growth by acquisition strategy is concentrated in South Africa at present. Regarding its interests in the rest of Africa, Van Buuren reassures that the group will only go into places where it knows the environment – for example, where AfroCentric’s major shareholder Sanlam has a presence. “The Africa strategy is a cautious approach with a big brother to help.”At the heart of AfroCentric and by far its biggest component is subsidiary Medscheme, a third-party administrator of medical schemes, servicing some well-known clients, with 3.7 million lives under management. Health insurers have recently experienced hospital cost and admissions blowouts, but these issues are now under control with hospital inflation firmly contained. However Government Employees Medical Scheme (GEMS) has been disappointing, plagued by government tightening and extensive claims over the past few years.
One key aspect of medical administration is tackling fraud. Van Buuren says recoveries are hugely up from the previous year. “When fraud is under control, we do the same work but for less cost,” he says, also bemoaning the medical professionals whose behaviour is less than ethical and has to be reported to the professional bodies.
A notable approach for AfroCentric is to now focus on making profits from claims, rather than the fee per member model. It also wants to reduce dependency on the Medscheme business and move away from being merely an administrator and manager of healthcare services into complementary businesses across the healthcare value chain.The retail segment contains operations such as Pharmacy Direct which saw growth in private and public sector prescriptions. Van Buuren cautions that group operating profit margins should decrease as the pharma segment grows in proportion to the overall business. The group is also digging deep into health IT solutions, in line with the proliferation and importance of wearable digital health devices and extensive data availability.
AfroCentric also sees future growth opportunities in providing care for those who cannot afford medical aid, for example blue-collar workers who need essential healthcare cover for about R500 a month. That type of offering helps avoid disruption at work, as an employee can see a professional in a short space of time instead of queuing for a day at a public hospital.
In the latest results, headline earnings per share came in at 21.67c, with some residual impairment on the very incongruous Jasco shareholding. Future acquisitions will be structured so as not to have such an impact on headline earnings per share as they did in the recent past. Finance charges have now normalised, and the annualised dividend yield is 4.38%.The flashing and unappealing line item on the balance sheet is the huge intangible asset number, sitting at around R1.6-billion. It comprises extensively of unamortised goodwill relating to acquisitions, with a large and recent chunk of this attributable to the Pharmacy Direct purchase. Also, a generous portion of intangibles is computer software. In general, the balance sheet is becoming more normalised after a spate of unusual corporate transactions.
The outlook for Afrocentric is business as normal, plus a launch of new products, and growing the client base.
Chris Gilmour is an investment analyst.

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