Credit Suisse downgrades Mediclinic over soft margins, volumes

Mediclinic International's litany of long-term margin challenges and slower medium-term volume growth in Abu Dhabi were behind Credit Suisse slashing its earnings forecasts and downgrading its recommendation to 'neutral'.

The Swiss bank cut its earnings per share forecast for the next three financial years by 17-23%, putting it 10-11% below the consensus, due to a litany of concerns: the pound's appreciation, shift to less profitable outpatient treatments and medical reimbursement cuts in Switzerland, slower revenue recovery in Dubai from stiffer competition, volume slowdown in South Africa due to constraints imposed by health insurers, lower associate income from its share in Spire Healthcare and higher depreciation and amortisation charges.

In Abu Dhabi, CS expects only a gradual recovery after a 15% loss of patient volumes in the last year, which it feels is "only partly
explained" by the THIQA card issue.

Last month as it reported final results, Mediclinic said it expected "gradual improvements" in the troubled Abu Dhabi business.

Analysts, which cut their target price to 840p from 985p as they moved down from the previous 'outperform' rating, said the stock should still receive good support from its substantial property backing.

While margins will be under long-term pressure, particularly as payers target lucrative revenue streams, the analysts felt the South Africa group can partly counter this through cost containment and improved capital efficiency.

There are further risks to the shares, including possible equity issuance to fund acquisitions in emerging markets or a full takeover of Spire, Swiss reimbursement reform shifting cases out of hospitals to less lucrative outpatient settings, further sterling volatility, a potential South African competition enquiry, though there remains potential upside from a UAE margin recovery.