The owner of Switzerland’s largest private hospital group, Mediclinic (LSE: MDC), should be one of the most defensive investments in the FTSE 100, and one of the best long-term buys for investors. But this really the case?
Today I’m looking at whether or not this medical giant deserves a place in your portfolio.
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Struggling for growth
As the demand for healthcare services around the world is only expanding, Mediclinic should be one of the FTSE 100’s most predictable growth stocks. Unfortunately, that is not the case. It has been struggling to grow within its home market of South Africa due to a weak economy, while regulatory headwinds in Switzerland have also weighed on growth.
To try and grow itself out of these issues, two years ago the company spent $2bn acquiring Al Noor Hospital, the Middle East-focused group. And it’s this business that helped the firm chalk up a 3% rise in core annual profit for the year to the end of March. Revenue for the period grew 3% in constant currency terms. Commenting on the performance, CEO Danie Meintjes said: “A key achievement was the strong second half performance in Abu Dhabi which, combined with the continued strong delivery in Dubai and the exciting expansion opportunities ahead, is laying the foundations for further growth across the Middle East division.“
The company reported an overall loss of £492m thanks to non-cash impairment charges on its holding in UK private hospital provider Spire, as well as Hirslanden, Mediclinic’s Swiss hospital business.
As my Foolish colleague, Edward Sheldon highlighted a few weeks ago, Mediclinic’s long-term story is appealing, and after several years of floundering it finally appears as if the firm is moving in the right direction. That said, the business does have a lot to prove to the market. Earnings per share have hardly budged over the past six years, even though revenue has increased tenfold.
Management is trying to reduce costs to improve margins, but there’s lots of work to be done. The group’s operating margin fell from nearly 20% in 2012 to 13% for 2017 and it’s negative for the year ending 31 March 2018. What’s more, today’s release contains a warning that despite the opportunities for growth in the healthcare industry around the world, rising demand is “juxtaposed by lower economic growth in some regions and greater competition” as well as “an increased focus on the affordability of delivering health care which is resulting in changing care delivery models and greater regulatory oversight.” In other words, is seems Mediclinic’s outlook is cloudy, and with this being the case, I’m not convinced that the shares offer value today.
At the time of writing, the stock trades at a forward P/E of 21.4, based on City estimates for 2019 and the shares yield 1.2%. For a business that has a patchy record of growth, and an uncertain outlook, this multiple looks too rich to me.