LIFE HEALTHCARE GROUP HOLDINGS LIMITED - Further trading statement

            
LHC
Further trading statement

LIFE HEALTHCARE GROUP HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2003/002733/06)
ISIN: ZAE000145892
Share Code: LHC
("Life Healthcare" or "the Group" or "the Company")

FURTHER TRADING STATEMENT

The Company is currently finalising its financial results for the year ended 30 September 2020 (year
under review), which are expected to be released on the Stock Exchange news Service (SENS) on or
about 19 November 2020.

COVID-19 pandemic
The COVID-19 pandemic (the pandemic) had a significant impact on the trading operations for the
Group in H2 FY2020. The impact of the pandemic has varied across the Groups geographic regions
and business lines due to the timing of the spread of the disease and the responses of the various
governments.

Since the outbreak of the pandemic the Company has:
    -   prepared for the pandemic and introduced COVID-19 specific plans covering facilities,
        operations, employees and clinical interventions; adopting guidelines issued by the Department
        of Health, the National Institute of Communicable Diseases, the World Health Organization,
        various medical societies and international best practice; ensured adequate personal protective
        equipment (PPE) for employees and doctors, developed detailed surge plans, set up COVID-
        19 doctor committees across all of its facilities and introduced specific cash conservation
        protocols
    -   treated c.11 000 COVID-19 patients in its southern African facilities of which less than 10 were
        public sector patients
    -   experienced a significant decline in medically necessary cases in southern Africa (as these
        cases were postponed). The Group has, however, seen a good recovery, since May 2020, in
        medically necessary procedures in southern Africa and the return to approximately 90% of pre-
        COVID-19 scan volumes in the majority of the territories in the international operations
    -   successfully implemented cash conservation protocols to conserve cash.

Financial performance
Shareholders are advised that the Groups revenue, normalised EBITDA, earnings per share (EPS),
headline earnings per share (HEPS) and normalised earnings per share (NEPS) for the year ended 30
September 2020 are expected to vary, as per tables below, from those reported for the year ended 30
September 2019 (prior year).

The main variances between the two financial years are a consequence of the impact of the pandemic
on the trading for the year under review and the impact of the disposal of our equity investment in Max
Healthcare included in the prior year.
  
 Measure                      Reported                  Expected                  Change         Note
                          30 September         30 September 2020
                                  2019

 Revenue                      R25 672m      R25 170m to R25 545m          -0.5% to -2.0%            1
  Southern Africa             R18 472m      R17 150m to R17 350m          -6.1% to -7.2%            2
  International                R6 931m        R7 700m to R7 850m        +11.1% to +13.3%            3
  Growth initiatives            R269m             R320m to R345m        +19.0% to +28.3%            4
 Normalised EBITDA
 (before the impact of
 IFRS 16)*                      R5 727m       R4 000m to R4 155m        -27.4% to -30.2%            1
  Southern Africa               R4 402m       R2 780m to R2 880m        -34.6% to -36.8%            2
  International                 R1 350m       R1 280m to R1 340m          -0.7% to -5.2%            3
  Growth initiatives              -R25m           -R60m to R65m                  >-100%            4

 Impact of IFRS 16 on
 normalised EBITDA            No impact           R240m to R255m

* Life Healthcare defines normalised EBITDA as operating profit before depreciation on property, plant
and equipment, amortisation of intangible assets and non-trading related costs and income.
The Group adopted IFRS 16 on 1 October 2019 and elected the modified retrospective approach, with
no restatement to comparative information. The impact of IFRS 16 on normalised EBITDA has been
excluded from the year under review for comparative purposes.

1. Group

    Life Healthcares 2020 financial year was a year of vastly different halves. The Group delivered an
    excellent performance during the first half of the year but trading was significantly impacted in the
    second half by the pandemic. The primary focus of the Group in the second half was to manage
    the impact of the pandemic. Revenue is expected to decrease by between 0.5% and 2.0% (2019:
    R25 672 million) over the prior year and normalised EBITDA before IFRS 16 is expected to
    decrease by between 27.4% and 30.2% (2019: R5 727 million).

    The normalised EBITDA margin before IFRS 16 for the year under review is expected to decline to
    approximately 16.0% (2019: 22.3%), mainly due to the pandemic negatively impacting trading
    activities from February 2020 and the increased costs associated with the pandemic.

    The Group implemented IFRS16 with effect from 1 October 2019 and this is expected to have a
    positive impact on the normalised EBITDA of approximately R248 million, an increase in net debt
    of around R1.6 billion as at 30 September 2020, but an immaterial net impact on earnings.


2. Southern Africa

    Southern Africa includes hospitals and complementary services, healthcare services and
    corporate.

    Revenue is expected to decrease by between 6.1% to 7.2% (2019: R18 472 million) for the year
    under review, with the southern Africa business severely impacted by the pandemic in H2 FY2020.
    The southern Africa operation has however seen a good recovery in medically necessary
    procedures since May 2020. Theatre minutes for the month of September 2020 were 10% lower
    than theatre minutes for September 2019. The increase in theatre minutes continued, with an
    increase of 13.5% from September 2020 to October 2020.

    The overall weighted occupancy for H1 FY2020 was 67.1% (H1 FY2019: 67.7%) but declined to
    49.8% for H2 FY2020. The southern African operations experienced their lowest monthly
    occupancy in April 2020 of 39.3% before recovering to just over 66% in July 2020 due to the high
    number of COVID-19 cases in that month. Occupancies decreased again in August 2020 and
    September 2020 as the increase in medically necessary procedures was slower than the drop off
    in COVID-19 cases. Overall weighted occupancy for the year was 58.4% (2019: 69.7%).
    Occupancy levels have continued to improve with occupancies in October 2020 of 58.1%. Paid
    patient days (PPD) for the year decreased by 15.7% (2019: +0.8%) with PPDs for H2 FY2020
    declining by 30.5% (H1:FY2020: +0.2%). Revenue per PPD increased by approximately 8.9%
    (2019: 5.8%). The increase in revenue per PPD is made up of a 4.4% tariff increase and a 4.5%
    positive case mix change.
   
    Normalised EBITDA before IFRS 16 is expected to decrease by between 34.6% and 36.8% (2019:
    R4 402 million) with the normalised EBITDA margin before IFRS 16 expected to be between 16.2%
    and 16.6% (2019: 23.8%).

    The estimated impact of the pandemic for the year ended 30 September 2020 on revenue and
    normalised EBITDA for southern Africa was R2.3 billion and R1.8 billion respectively.

    As previously communicated on SENS on 9 June 2020, the southern Africa operation was the victim
    of a vicious criminal cyber-attack that impacted all its information technology (IT) systems. The
    systems were fully restored by the end of September 2020. The direct costs of the restoration on
    the IT infrastructure amounted to approximately R64 million.

    The Group had excellent patient quality scores, with pleasing improvements shown in the
    healthcare associated infection (HAI) rate and the patient safety adverse event rate.

3. International

    International comprises diagnostic services (Alliance Medical) and healthcare services (Scanmed).

    Revenue from the international operations is expected to increase by between 11.1% and 13.3%
    (2019: R6 931 million). The weakening of the rand against the pound sterling, euro and polish zloty
    had a positive impact on the Group results during the year.

    Alliance Medical experienced significant reductions in scan volumes (approximately 60% to 65%
    reduction on average) from mid-March 2020 to mid-May 2020 across all its major geographies. The
    reduction in volumes was due to national healthcare systems prioritising urgent and emergency
    cases as well as country-specific lockdowns, patient self-isolation and adherence to social
    distancing guidelines, resulting in significant reduction in patient referrals, increases in patient
    cancellations and non-attendance for appointments.

    By September 2020, the international operations returned to approximately 90% of pre-COVID-19
    scan volumes in the majority of territories. The increase in scan volumes across all Alliance Medical
    markets, since the gradual easing of lockdowns in Europe from May 2020, has been encouraging.
    The scan volumes in our PET-CT centres in the United Kingdom (UK) are ahead of the prior year
    (+1.8%), with scan volumes for Q4 FY2020 up 5.2% from Q4 FY2019, demonstrating the
    robustness of our molecular imaging offering. All PET-CT Wave II contracts are now operational.

    Within our Alliance Medical business, we delivered a number of services to support governments
    in their response to the pandemic, such as testing in Italy and the delivery of a dedicated mobile
    CT service for up to 16 units in England, which continues into FY2021. This contributed positively
    at a revenue level to compensate for the reduction in scan volumes.

    The normalised EBITDA margin before IFRS 16 for Alliance Medical is expected to be between
    18.5% and 19.0% (2019: 22.4%).

    Scanmed, our Polish business, had a good performance in the year under review, with an
    improvement on the prior year, as some of its facilities were designated as non-COVID facilities
    and provided elective treatments to patients from other government facilities.

    The normalised EBITDA margin before IFRS 16 for Scanmed is expected to be between 9.0% and
    9.4% (2019: 7.2%), largely as a result of operational efficiencies and backdated NFZ pricing
    increases. The overall financial impact of the pandemic on Scanmed during the year under review
    was minimal.

    The estimated net impact of the pandemic for the year ended 30 September 2020 on revenue and
    normalised EBITDA for our international operations was R437 million and R291 million respectively.
    The impact of the pandemic was reduced as a result of the benefit received due to the additional
    services to governments to support their COVID-19 response.

    The Group restarted the Scanmed disposal process during September 2020.

4. Growth initiatives

    The growth initiatives are aimed at broadening Life Healthcares southern Africa exposure across
    the healthcare continuum by expanding the new outpatient business model, developing the imaging
    services opportunity, investing in data analytics and clinical quality products. Good progress was
    made with the development of the imaging opportunity, but experienced delays due to the
    uncertainty of the impact and timing of the pandemic. Life Molecular Imaging (LMI), our primary
    international growth initiative, performed well. Revenue in pound sterling increased by
    approximately 6.6% against last year.

    The growth initiatives at normalised EBITDA level before IFRS 16 delivered an expected loss of
    between R60 million and R65 million (2019: loss of R25 million). The loss in the year under review
    included a non-trading foreign exchange loss of R8 million (2019: profit: R30 million).


5. EPS, HEPS and NEPS

     Measure                                  Reported            Expected                Change
                                          30 September        30 September
                                                  2019                2020
     Shares in issue (million)                   1 467               1 467
     Weighted average number of
     shares (million) (approx.)                  1 456               1 455                  -0.1%

     EPS (cps)                                   176.4         35.0 - 40.0       -77.3% to -80.2%
     HEPS (cps)                                   88.7         46.0  51.0       -42.5% to -48.1%
     NEPS (cps)                                  116.4         58.0  63.0       -45.9% to -50.2%

   EPS, HEPS and NEPS for the year 30 September 2020 includes a negative impact of IFRS 16 of
   approximately 1.3 cps (2019: no impact).

   In addition to the trading items mentioned, EPS, HEPS and NEPS were further impacted as follows:
       -    Earnings in the prior year includes a non-recurring profit on disposal of our equity
            investment in Max Healthcare (net profit on in FY2019 of 68.5 cps). The earnings have
            been positively impacted in the year under review (+9.3 cps) by the reduction in post-tax
            interest cost of R135 million as a result of the repayment of debt in Q4 FY2019, following
            the disposal.
       -    The Group has accounted for impairments of obsolete software in South Africa
            (approximately R5 million) and in the book value of the Scanmed business. A slowdown in
            the Polish healthcare economy, partly due to the impact of the pandemic, led to a reduction
            in forecast cash flows and resulted in an impairment of approximately R160 million. The
            effect of all the impairments is a decrease in EPS of approximately 11.3 cps. This is
            excluded from HEPS and NEPS.

       -    The results for the year under review also include:
              o   a gain on derecognition of a finance lease asset and liability (as a result of acquiring
                  a leased property in South Africa) of approximately R50 million, net of tax
              o   an increase in contingent consideration relating to past acquisitions in
                  international operations of approximately R100 million
              o   a deferred tax charge on the unrecognised exchange gain on Scanmed inter-
                  company loan of R133 million.
            The total impact of these items is expected to be a loss of approximately 12.8 cps.

Capital risk management and liquidity
The Group continuously updates its cashflow forecasts. These forecasts take into consideration known
factors as well as a number of key assumptions regarding the evolution of the pandemic and model a
base case and a bear case that is used to manage liquidity requirements. The Group negotiated
amended bank covenants for the reporting periods ending 30 September 2020 and 31 March 2021 due
to the uncertainty of the pandemic. However, the Group was well within its original bank covenant for
net debt to normalised EBITDA of 3.50 times as at 30 September 2020.

The Group refinanced its term debt in the international operations during March 2020 and this has
extended the debt maturities that were due in November 2020 out to 2023 and 2025. This refinancing
also increased the committed facilities in the international operations by approximately GBP55 million.

The Groups available undrawn bank facilities as at 30 September 2020 were R6.3 billion.

The financial information on which this trading statement is based represents the Groups latest financial
estimates and has not been reviewed nor reported on by Life Healthcares external auditors.

Illovo
10 November 2020

Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)

Date: 10-11-2020 02:00:00
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