Investec downgrades Mediclinic on expectations for weak SA rand

Investec downgraded Mediclinic's London-listed shares despite having a more positive view than management on the outlook for the company's business in the United Arab Emirates, in anticipation of a weakening in the South Africa rand.

In an update post the company's results for fiscal year 2017, the broker lowered its estimates for Mediclinic's sales in the UAE in fiscal year 2018 and for all of the regions in which it operated, especially the UAE and SA, in fiscal year 2019.

Management was right to adopt a cautious stance on the UAE business despite recent positive regulatory changes, analyst Cora McCallum said, pointing to successive profit warnings, although she believed there was now room for upgrades on that front.

Nevertheless, she also cut her earnings per share forecasts for the company in fiscal years 2018 and 2019 by 16% and 19%, respectively, due to her broker's expectations for that African currency.

In local currency, the analyst marked down her estimates for the company's earnings before interest, taxes, depreciation and amortisation in South Africa for 2018 and 2019 by -5% and -6%, in Switzerland by -3% and -8% and in the UAE by -20% and -21%.

Her estimates were thus now in-line with consensus in local currency terms, but Investec's forecasts for Sterling to appreciate and the rand to weaken meant its fiscal year 2018 EPS estimate was 12% below other analysts', she said in a research report sent to clients.

To take note of, Switzerland was expected to provide "steady" numbers, with the analyst further highlighting how Mediclinic was the only hospital group which offered investors exposure to the Swiss market - a key differentiator.

McCallum also expected that market to continue to be the dominant contributor to the group's earnings.

She downgraded Mediclinic's London-listed shares from 'buy' to 'hold' but kept her recommendation on the Johannesburg line at a 'buy', saying the latter offered South African investors a currency hedge.

Rolling forward her target price brought it from 749.0p to 775.0p.