The small and mid-cap sector in South Africa receives limited coverage by the local investment community but there are a handful of interesting new businesses which have come to market in the past 2 years which investors may want to keep their eyes on.
The JSE-listed healthcare sector is primarily dominated by Mediclinic (Market capitalisation of R86bn) and Netcare (R44bn). These 2 businesses trade on forward price to earnings multiples of 24 and 18 times earnings respectively, suggesting rich future valuations.
Few investors are aware of RH Bophelo (RHB) which is a relatively new player on the JSE . The company is aiming to position itself as a niche player in the affordable healthcare space.
RH Bophelo was listed on the JSE in July 2017 as a Special Purpose Acquisition Company (SPAC) and raised R500m on listing.
The company is in the process of bedding down a series of acquisitions which include:
VPH (76% stake):
This is a collective comprising the Vryburg Private Hospital Equipment Trust, Vryburg Private Hospital Property Trust and the Vryburg Private Hospital Trust which collectively operate a hospital in the North West which has 18 doctors and can service up to 44 patient beds.
- Obstetrics: six beds;
- Paediatrics: four beds;
- ICU/ High care: two beds; and
- Adult beds: 32 beds (Surgical beds: eight, General: 24 beds).
The 76% shareholding has been valued at between R29m and R31m and the entire business is estimated to make a profit of around R3.7m.
Africa Healthcare Proprietary Limited (60% stake)
This business comprises:
- Owns and operates the St Helena Private Hospital, a 131 bed hospital in Welkom and the Fountain Private Hospital, a 163 bed hospital in Carletonville;
- Manages a 115 bed private hospital in Nelspruit as well as a managed care facility in Welkom;
- Medical services, ambulance and pharmacy services supporting these assets
- The Africa Healthcare Nursing College which trains 350 medical professionals each year
According to RHB, this 60% stake has been valued at R65.3m.
Why is RHB potentially an interesting investment?
While Netcare and Mediclinic have cornered much of the mainstream middle-class market in South Africa, RHB has focused on outlying regions where its hospitals service large markets.
For example, the VPH assets services a catchment area of over 250km, giving it an investment “moat” of sorts.
In a country like South Africa – where the middle-class is rapidly growing– quality affordable healthcare will be essential.RHB management point to the WHO’s Global Monitoring Report which indicates that half of the world’s population (roughly 3,8bn people) lacked access to affordable quality healthcare.
Early stage businesses and investment vehicles often find it difficult to access capital. The SPAC has provided a tool for an entrepreneurial team to have capital to identify opportunities in the sector and deploy capital.
Risks facing RHB as an investment
Investors quite simply don’t know what they are getting.
RHB is a young business which has raised R500m. It is now up to management to do the deals and make sure that they can create value for shareholders. This is an important consideration and to highlight this: RHB has touted its two transactions as “completed” but by the end of April 2018 (deals originally announced in November 2017), these transactions hadn’t been finalised.
The second consideration is lack of liquidity in the share. Between 19 April and 4 May 2018, not a single trade took place. Investors will be looking for guidance from management around where the growth opportunities lie.
A third investor consideration is going to be around the positioning of assets going forward. While there is an enormous social importance in offering healthcare in outlying communities such as Carletonville, the town was built around mining assets, many of which are simply not commercially viable. The trick is going to be to identify growing communities and get an early mover advantage over the major players.
Full year financial results are due out shortly and may provide additional information.
South Africa requires entrepreneurial businesses that are focused on servicing developing segments of the market.
RH Bophelo fits the bill with an experienced management team and a credible set of advisors and partners including RMB, ENS and Deloitte.
While it is a long way off the finished product, it is a business worth watching.