Financial director’s review

Life Healthcare performed well during the period under review and is in a healthy financial position to deliver on its strategic objectives. This review of the operating performance, the financial position of the group, and the listing on the JSE , should be read in conjunction with the audited consolidated financial statements for the year ended 30 September 2010 presented on pages 66 to 177.

Trading results and cash generated

We continue to invest in our facilities to ensure that they meet the demand for services and are abreast of modern technology and standards. During 2010, Life Healthcare invested R 813 million (2009: R 603 million) comprising capital projects of R 516 million (2009: R 551 million) and acquisitions of R 297 million (2009: R52 million). A further R 600 million has been allocated for capital projects, excluding acquisitions, in the 2011 financial year.

The increase in medical scheme members, the group’s share of preferred network members and the age and disease profile in South Africa continued to drive the growth in demand for hospital services. Hospital volumes as measured by paid patient days (PPDs) increased through organic growth in existing facilities, expansions and upgrades at selected facilities, and the acquisition of Life Bay View Private Hospital.

PPDs increased by 2.5% contributing to a 10.8% growth in revenue to R8 786 million.

The containment of costs is one of our strategic objectives to ensure the affordability and sustainability of healthcare services. Life Healthcare has a number of productivity and efficiency programmes aimed at eliminating unnecessary costs without affecting the quality of our services. These initiatives use technology to streamline processes, leverage capabilities and optimise product usage. Case mix and acuity are monitored to facilitate better staffing levels and improve utilisation of resources. While the hospitals have expanded with increased bed capacity, occupancies, which are important to operating efficiencies, have been sustained. The partnership with private medical insurers continues, and through our preferred network agreements we service a large portion of this market which has contributed to occupancy levels.

Cost control combined with healthy occupancies boosted normalised EBITDA, a key measure of the trading results, by 14.8% from R 1 893 million to R 2 173 million. Operating profit before taxation increased by 20.1% to R 1 867 million (2009: R1 555 million) after amortisation of intangibles of R 122 million (2009: R 123 million) and retirement benefit surpluses of R 105 million (2009: R 16 million). The intangibles are being amortised over a maximum period of 15 years.

The business generated healthy cash flows. The streamlined administrative processes contributed to tight working capital management resulting in cash generated from operations before interest and taxes of R2 233 million (2009: R1 895 million).

Initial public offer (IPO), listing on the JSE and earnings

The Group completed its IPO on 10 June 2010 with new investors taking up 387 million shares. The listing included the issuing of 321 million new shares raising R4 341 million and simultaneously repurchasing an equal number of shares out of share premium (R803 million) and distributable reserves (R3 216 million), which attracted an STC charge of R322 million. The remaining 66 million shares were sold by shareholders to new investors. These transactions had the following effect:

The Group did not raise any cash as a result of the listing as it has sufficient facilities and capacity to meet expected operating requirements. Total shareholder funds were not affected by the new share issue and repurchase, however the structure of the repurchase through distributable reserves and the STC charge has resulted in negative retained earnings at S eptember 2010 of R 1 079 million.

The majority of the IPO costs and the STC payable of R322 million were borne by the selling shareholders. The IPO constituted a liquidity event for the employee trust and the unamortised future cost of R 36 million had to be recognised in terms of IFRS 2 with a total charge in the current financial year of R 61 million (2009: R 25 million).

Through Health Strategic Investments (HSI ) the empowerment shareholders, Brimstone Investment Corporation Limited and Mvelaphanda Group Limited, will unbundle 277 million shares to their respective shareholders in December 2010.

The following charges and taxes have affected the earnings and headline earnings. The table below reconciles the impact on earnings.

Statement of financial position

The Group is in a strong financial position with low gearing. The debt negotiated in 2005 was refinanced in May 2010 reducing interest costs, increasing flexibility in respect of future funding and extending the debt term. The Group has adequate facilities to meet expected needs with a working capital facility of R 250 million and an uncommitted revolving credit facility of R 1 billion.

The Group has hedged its exposure to interest rate movements through an interest rate swap taken out on 22 September 2009, which fixed the interest rate on R750 million at 7.61% until F ebruary 2011 and a further R750 million at 8.18% until F ebruary 2012.

The Group is well covered in terms of the debt covenants.

Dividends

A dividend of R290 million was paid in December 2009 in respect of the previous financial year. Due to the sound results and healthy cash flows, after the IPO, the board declared an interim dividend on 11 July 2010 of 23 cents per share amounting to R240 million.

The board of directors has reviewed the dividend policy and timing of dividend payments and has approved a dividend cover between 1.75 and 2.75 times. The directors have declared a final cash dividend of 29 cents per share amounting to R302 million.

Roger Hogarth
Financial director