Commentary

Life Healthcare had a positive trading performance for the period ended 31 March 2021 (H1-2021, or the current period), particularly given the continuing impact of the COVID-19 pandemic (COVID-19, or the pandemic).

During the current period, the Group experienced the full impact of the second COVID-19 wave, whereas the effect of the first COVID-19 wave in the six months ended 31 March 2020 (H1-2020, or the prior period) was felt primarily in the international business with the southern African business impacted for only a two week period in March 2020.

As the effects of the pandemic have now persisted for a full 12-month period, the Group has provided comparative information relating to the prior period and pro forma information for the six months ended September 2020 (H2-2020) to illustrate the sequential improvement in the financial results.

The Group announced the sale of Scanmed in Poland in November 2020 and this process was finally concluded on 26 March 2021. Scanmed has been presented as a discontinued operation in the current and prior period results. As a result, the prior period results have been re-presented.

In summary, the results for the Group are as follows:

• Revenue from continuing operations grew by 4.0% to R13.0 billion
• Normalised EBITDA from continuing operations declined by 14.3% and the normalised EBITDA margin declined to 18.6% (H1-2020: 22.6%), although the margin has increased from 11.7% in H2-2020
• A strong performance by AMG with overall activities broadly returning to pre-COVID-19 levels and revenue growing by 27.2% to R3.7 billion
• An improved performance in southern Africa despite the increased severity of the second COVID-19 wave between December 2020 and February 2021
• Completed the sale of Scanmed with R681 million in net proceeds

The Group adopted IFRS 16 on 1 October 2019 and elected the modified retrospective approach, with no restatement to comparative information. All the numbers presented in these results are inclusive of IFRS 16.

Group revenue increased by 4.0% to R13.0 billion (H1-2020: R12.5 billion), consisting of a 3.4% decline in southern African revenue to R9.1 billion (H1-2020: R9.4 billion), a 27.2% increase in international revenue to R3.7 billion (H1-2020: R2.9 billion) and a R170 million revenue contribution from growth initiatives (H1-2020: R157 million).

Normalised EBITDA decreased by 14.3% to R2.4 billion (H1-2020: R2.8 billion). This decrease in normalised EBITDA was driven largely by southern Africa, which saw normalised EBITDA decline by 32.5% to R1.5 billion (H1-2020: R2.2 billion) due to negative operating leverage resulting from both lower activity levels and higher
COVID-19-related operating costs.

International

International revenue only includes revenue from AMG’s diagnostic services across Europe and the UK.

AMG performed strongly during the current period despite the second COVID-19 wave experienced across Europe. Revenue increased by 27.2% to R3.7 billion (prior period R2.9 billion). Revenue, in pound sterling, grew by 18.9% to £181.4 million (H1-2020: £152.6 million). This increase was driven by a number of factors, including the impact of additional COVID-19 solutions for the National Health Service (NHS), COVID-19 blood testing in Italy and a strong performance in Ireland. AMG saw strong growth in volumes within our PET-CT centres in the UK towards the end of the current period.

AMG reported growth in normalised EBITDA of 48.8% to R930 million (H1-2020: R625 million) and 38.9% growth in pound sterling to £45.0 million (H1-2020: £32.4 million). The normalised EBITDA margin was 24.8% (H1-2020: 21.2%). The margin uplift was driven by the higher volumes described above, as well as the resolution of radiopharmacy supply issues following the opening of the fifth cyclotron site in Dinnington in January 2021.

AMG has worked closely with governments across the UK and Europe to provide high quality radiology services throughout the pandemic, often at short notice. AMG’s proven ability to quickly mobilise scanning equipment and staff across multiple locations places AMG in a good position to continue securing public sector contracts.

Pleasingly, 72% of AMG employees across the UK and Europe have received their first COVID-19 vaccine.

Southern Africa

In southern Africa, hospitals and complementary services comprise all the acute hospitals and complementary services, which include mental health, acute rehabilitation, renal dialysis and oncology. Healthcare services comprise Life Esidimeni and Life Employee Health Solutions. Corporate is also included within southern Africa.

Southern Africa experienced a severe second COVID-19 wave during H1-2021 impacting activities and resulting in increased underlying costs. The southern African business had initially experienced a good return of activities in October and November 2020 prior to the second COVID-19 wave which impacted the business over December 2020, January and February 2021. Since then, the southern African business has experienced a return of non-COVID-19 activities with the business performing strongly in March 2021, a trend that has continued into April and the early part of May 2021.

The southern African business continues to learn, adapt and change to accommodate the COVID-19 environment. Thus, while the performance in the current period has declined compared to the prior period, the business has demonstrated an improved performance compared to H2-2020 despite the more severe second COVID-19 wave.

Revenue from southern Africa decreased by 3.4% to R9.1 billion (H1-2020: R9.4 billion) but increased by 15.9% compared to H2-2020 (R7.8 billion). Normalised EBITDA decreased by 32.5% to R1.5 billion (H1-2020: R2.2 billion) but increased significantly compared to R0.7 billion at H2-2020. The normalised EBITDA margin for the period declined to 16.6% (H1-2020: 23.8%) but saw an improvement compared to 8.5% at H2-2020. The margin was affected by the impact of lower elective surgery and other non-COVID-19-related activities due to the second COVID-19 wave and the additional costs of providing services while adhering to COVID-19 protocols.

Revenue from hospitals and complementary services declined by 4.5% with a 12.1% increase in revenue per paid patient day (PPD) offset by a 14.9% decline in PPDs. The increase in revenue per PPD is made up of a 4.1% tariff increase and an 8.0% positive case mix change.

The overall weighted occupancy for the period decreased to 57.4% (H1-2020: 67.1%), but increased from the 50% weighted occupancy during H2-2020.

Revenue from healthcare services increased by 12.0% to R736 million (H1-2020: R657 million). This positive result was due to additional services and benefits offered through both wellness and occupational health channels, driving higher revenue per life covered as well as a good performance from Life Esidimeni.

The Group is supporting the vaccination programme and is pleased with the progress made in vaccinating healthcare workers. The Group will continue to play a supporting role in the subsequent vaccination phases as the government looks to vaccinate the South African population. As part of this support, 22 Life Healthcare and 20 Life Employee Health Service facilities across the country have been registered as potential vaccination sites. The majority of Life Healthcare employees and doctors have been vaccinated.

Growth initiatives

The growth initiatives are aimed at broadening the Company’s exposure across the healthcare continuum, and include, in southern Africa, developing the imaging services opportunity, a new outpatient business model, investing in data analytics and clinical quality products. Progress continues to be made across each of these areas.

LMI performed in-line with expectations during the current period, with continued sales volumes despite the onset of the pandemic. Neuraceq sales would benefit from the approval of an Alzheimer’s disease modifying drug (DMD) and, while we are cautiously optimistic that news of a successful DMD candidate will emerge within the next few months, it is difficult to predict exactly when this might occur. Biogen’s Alzheimer’s drug, aducanumab, has been submitted to the U.S. Food and Drug Administration (FDA) for approval and we expect a decision from the FDA by mid-June 2021.

Revenue from growth initiatives, largely from LMI, grew 8.3% to R170 million (H1-2020: R157 million). The normalised EBITDA loss narrowed to R22 million (H1-2020: R39 million).

EPS from continuing operations decreased by 9.4% to 49.9 cents (H1-2020: 55.1 cents), while EPS from continuing and discontinued operations increased by 4.1% to 55.9 cents (H1‑2020: 53.7 cents).

HEPS from continuing and discontinued operations decreased by 11.9% to 47.4 cents (H1-2020: 53.8 cents).

NEPS from continuing operations, which excludes non-trading-related items listed below, decreased by 2.4% to 52.8 cents (H1-2020: 54.1 cents). NEPS from continuing and discontinued operations increased by 1.3% to 55.7 cents (H1-2020: 55.0 cents). The presentation of normalised earnings is a non-IFRS measure.

Earnings have been positively impacted (+6.0 cents) by the profit from the discontinued operation of R87 million, net of tax. Refer to note 1.

The Group continues to manage liquidity during the pandemic and has curtailed some capital expenditure. It has invested approximately R729 million (H1-2020: R1 146 million), comprised mainly of capital projects of R631 million (H1-2020: R1 145 million) and new acquisitions (net of cash acquired) of R98 million. The maintenance capex for the period was R466 million (H1-2020: R598 million).

The Group is in a strong financial position with net debt to normalised EBITDA¹ as at 31 March 2021 at 2.78 times (H1-2020: 2.24 times and 2.96 times at 30 September 2020). The net debt to normalised EBITDA position has improved due to the Scanmed disposal, improved trading across the Group, curtailed capital expenditure and good working capital management in the current period (driven by focused debt collection in southern Africa).

During 2020, the Group engaged with its lenders and received temporary relaxation on the measurement of covenants. These came to an end on 31 March 2021 and the Group reverted to its prior covenants (the main one being 3.5x net debt to normalised EBITDA). The Group continues to have headroom on its bank covenants and is expected to remain within these covenants for the next reporting period based upon current forecasts.

The Group refinanced its term debt in the international operations during March 2020 and this extended the international debt maturities that were due in November 2020 to 2023 and 2025. Given the ongoing uncertainty around COVID-19 and the future impact that this may have on the Group, Life Healthcare has kept in place additional banking facilities that were put in place during 2020. The available undrawn facilities as at 31 March 2021 amounted to R6.4 billion.

The Group will continue its cash preservation drive across its operations.

The board of directors has decided, considering the current trading conditions and the uncertainty around the timing and magnitude of a potential third COVID-19 wave, to continue to preserve cash and not to pay an interim dividend for the current period. This position will be reviewed for the full year.

Life Healthcare continues to adopt a cautious approach due to the ongoing impact of COVID-19, particularly with regard to the southern African business and the uncertain impact a potential third COVID-19 wave may have on the business. Despite this, Life Healthcare expects a continued positive performance for the six months ending 30 September 2021 (H2-2021) from AMG given the continuing demand for scans across the business. In southern Africa, we anticipate continued growth in revenue and normalised EBITDA in H2-2021 if the recent activity trends continue, but this would be subject to the timing and magnitude of a potential third COVID-19 wave in the H2-2021 period.

Capex for FY2021 is expected to amount to R1.2 billion in southern Africa (down from prior guidance of R1.5 billion) and R0.9 billion in AMG. The reduction in capex follows a review of certain projects in light of the Group’s continued focus on cash preservation.

Mr MA Brey retired from the board as director and Chairman with effect from 27 January 2021. Dr VL Litlhakanyane was appointed as the non-executive Chairman of the board from this date.

Ms A Parboosing stepped down as the Group Company Secretary as at 28 February 2021 to assume the role of Chief People Officer within the Company. Ms J Ranchhod was appointed in the role with effect from 1 March 2021.

Life Healthcare’s results for the 12 months ending 30 September 2021 are expected to show an increase of more than 100% in EPS from those reported for the financial year ended 30 September 2020 (EPS: -6.4 cents) to at least a positive EPS. This is primarily due to the impairment of R793 million (reducing EPS by 54.5 cents) recognised in FY2020 relating to Scanmed.

A detailed trading statement will be released in early November 2021. The forecast financial information on which this trading statement is based has not been reviewed and reported on by the Group’s external auditors.

Shareholders are advised that the investor presentation for the six months ended 31 March 2021 has been published on Life Healthcare’s website (www.lifehealthcare.co.za).

The Company’s ability to respond effectively to the pandemic and provide quality care to its patients in this time of crisis is largely due to the dedication and unwavering support of its employees and doctors. Life Healthcare would like to thank them for their unwavering support and courage, for their tireless work, and for the care they delivered under difficult circumstances. The Company extends its sincere condolences to those who have lost family, friends and loved ones to the pandemic.

Approved by the board of directors on 26 May 2021 and signed on its behalf:

Date: 27 May 2021