Netcare Limited

("Netcare", "the Company" or "the Group")

Registration number: 1996/008242/06 (Incorporated in the Republic of South Africa) JSE share code: NTC ISIN ZAE000011953

Summarised Audited Group Results for the year ended 30 September 2016 FINANCIAL HIGHLIGHTS

Group EBITDA up 11.2% R5 539 million

Normalised profit after taxation up 19.1% R2 906 million

Adjusted HEPS up 5.6%

199.5 cents

Final dividend per share up 5.6%

57.0 cents COMMENTARY

Key financial results

Year ended

30 September

Rm 2016

30 September

2015 % change

Revenue 37 796 33 711 12.1

EBITDA 5 539 4 981 11.2

EBITDA margin 14.7% 14.8%

Operating profit 4 148 3 728 11.3

Operating profit margin 11.0% 11.1%

Normalised profit before taxation 3 872 3 375 14.7

Normalised taxation (966) (936)

Normalised profit after taxation 2 906 2 439 19.1

Exceptional items:

RPI swap instruments fair value adjustment (1 988)

Taxation effect 130

Profit for the year 1 048 2 439

OVERVIEW

The Netcare Group is pleased to report an increase in EBITDA of 11.2% and growth in normalised profit after taxation of 19.1% for the year ended 30 September 2016. Adjusted headline earnings per share ("adjusted HEPS") grew by 5.6% to 199.5 cents (2015: 189.0 cents). Our operations in South Africa ("SA") delivered solid results, with activity boosted by the prior year's investment in 584 new beds. Our business in the United Kingdom ("UK"), BMI Healthcare ("BMI"), delivered a credible performance in a challenging trading environment.

The reported Group results were impacted by a significant, but technical, non-cash fair value accounting charge arising on the Retail Price Index ("RPI") swap instruments related to existing long-term property leases in the UK, which are the subject of a pending rent reduction transaction ("UK Rent Transaction"). Further details of the valuation of the RPI swap instruments and the UK Rent Transaction are provided later in this report. Given the exceptional nature of the RPI swap instrument fair value accounting charge, its impact has been separately disclosed and the commentary that follows refers to normalised results exclusive of this non-cash charge.

The accounting policies applied in preparing the audited Group financial statements are consistent in all material respects with those applied in the prior year ended 30 September 2015.

GROUP FINANCIAL REVIEW

Financial performance

Group revenue rose 12.1% to R37 796 million (2015: R33 711 million). Currency conversion accounted for R2 240 million of this increase. The average exchange rate of R21.04 used to convert UK income and expenditure during the 2016 financial year was 13.4% weaker than the average exchange rate of R18.55 in the prior year.

Group earnings before interest, tax, depreciation and amortisation ("EBITDA") grew 11.2% to R5 539 million (2015: R4 981 million). Currency conversion accounted for R149 million of the increase. Operating profit improved 11.3% to R4 148 million (2015: R3 728 million).

Net financial expenses were lower at R433 million compared to R467 million in the prior year.

Normalised profit before taxation increased 14.7% to R3 872 million (2015: R3 375 million). The Group's normalised taxation expense increased to R966 million (2015: R936 million), representing an effective tax rate of 24.9% (2015: 27.7%). Normalised profit after taxation rose 19.1% to R2 906 million (2015: R2 439 million).

Financial position and cash flow

Total assets at 30 September 2016 reduced by 3.2% to R30 659 million (2015: R31 664 million) as a result of a notable strengthening of the Rand against the Pound Sterling. The closing exchange rate of R17.79 (2015: R20.94) contributed R2 210 million of the decrease. Total shareholders' equity decreased 8.9% to R13 009 million (2015: R14 281 million), affected by currency fluctuations and the after-tax impact of the exceptional non-cash RPI swap instrument fair value accounting charge.

At 30 September 2016, the Group's net debt was R5 543 million (2015: R5 790 million). The net debt to EBITDA ratio improved to 1.0 times (2015: 1.2 times), driven largely by lower UK debt balances translated at lower exchange rates. Interest cover remained strong at 11.1 times (2015: 11.2 times).

In SA, net debt increased to R3 587 million from R3 292 million a year before. Net debt in the UK decreased to £110.0 million at 30 September 2016 from

£119.3 million at the prior year-end. The maturity date of the UK revolving credit facility of £36.0 million has been extended to March 2018.

Cash generated from the Group's operations rose 6.6% to R5 282 million (2015: R4 956 million) with a consistently strong cash conversion of 95.4 %.

The Group invested R2 822 million (2015: R2 653 million) in capital expenditure, including intangible assets. Ordinary dividends of R1 250 million (2015: R1 166 million) were paid to shareholders and R74 million (2015: R211 million) to beneficiaries of our Health Partners for Life ("HPFL") broad-based black economic empowerment trusts. Combined cash payments to shareholders, empowerment partners and revenue authorities amounted to R2 335 million (2015: R2 539 million).

DIVISIONAL REVIEW

South Africa

Revenue increased 9.7% to R18 958 million (2015: R17 289 million). EBITDA grew 5.0% to R4 147 million (2015: R3 948 million) with margins of 21.9%

(2015: 22.8%). Operating profit rose 4.0% to R3 548 million (2015: R3 411 million) and adjusted HEPS increased 2.2% to 186.9 cents (2015: 182.9 cents).

Cash generated from operations was marginally lower at R4 120 million (2015: R4 150 million) with a cash conversion ratio of 99.3%. Capital expenditure, including intangible assets, totaled R2 054 million (2015: R1 895 million).

Netcare remains committed to actively driving an enhanced quality and safety agenda throughout the organisation. We continue to monitor over 300 quality outcomes and process measures aligned to the Quadruple Aim objectives of best patient outcome, best patient experience and cost effective care, combined with excellent staff training and support. We are pleased to have shown continued year-on-year improvement in most of these key elements and are grateful for the concentrated efforts of leadership, staff and all our stakeholders in collectively building on our vision of being leaders in the highest quality of care.

Notable accolades during the year included:

2016/17 Ask Afrika Orange Index

Netcare won the 2016/17 Ask Afrika Orange Index Award in the private hospitals category and also achieved 6th place overall across all industries measured. This is the first time that a company in the private hospital category featured among the Top 10. The index acknowledges customer service excellence across various industries, with 135 companies across 33 industries having been benchmarked in the 2016/17 index.

Antimicrobial stewardship programme at Netcare hospitals

The achievements of a five-year pharmacist-driven antibiotic stewardship programme in reducing antibiotic usage across 47 Netcare hospitals were highlighted in a research paper recently published in 2016 Lancet Infectious Diseases.

2016 PMR.africa Awards

Netcare St Augustine's and Netcare Christiaan Barnard Memorial hospitals each won a PMR.africa Diamond Arrow Award, the highest possible accolade, in the category for private hospitals/clinics in KwaZulu-Natal and City of Cape Town/Cape Peninsula respectively.

2016 Top 100 Most Empowered JSE Listed Companies

Netcare has been ranked 16th overall in the 2016 Top 100 Most Empowered JSE Listed Companies Report.

2016 PMR.africa Diamond Arrow Award for Corporate Social Responsibility Initiatives

Netcare won the national Diamond Arrow Award for the Group's corporate social responsibility initiatives for the 4th consecutive year.

2016 FTSE/JSE Top 30 Responsible Investment Index

Netcare has been included in the 2016 FTSE/JSE Top 30 Responsible Investment Index.

2016 RobecoSAM Bronze Class Sustainability Award

Netcare achieved a Bronze Class distinction for its excellent sustainability performance, and has also been included in the 2016 RobecoSAM's 'The Sustainability Yearbook', the world's most comprehensive publication on corporate sustainability for the second consecutive year.

Hospital and Emergency Services

Netcare experienced strong demand for its private healthcare services, despite low economic growth and a decline in total medical scheme beneficiaries of 0.06% to 8.809 million at 31 December 2015 from 8.814 at the end of the previous calendar year (as reported by the Council for Medical Schemes).

Patient days grew by 4.7% compared to the prior year. Patient days grew by 2.4% excluding the growth from the new greenfield hospitals in Polokwane and Pinehaven. The 584 new beds added in the prior year initially diluted occupancy levels, but excellent traction, especially at our new hospitals in Polokwane and Pinehaven, resulted in occupancy levels for the year of 67.2% (2015: 67.8%), representing a strong recovery against the half-year occupancy of 64.4%.

Revenue grew 10.3% to R17 780 million (2015: R16 119 million). Net revenue per patient day was up 5.2%, impacted by a shift from surgical to medical cases of 1.6%. EBITDA increased 5.0% to R4 029 million (2015: R3 837 million) and EBITDA margins improved slightly from 22.6% in the first half to 22.7% for the full year (2015: 23.8%). Margins have been influenced by cost inflation which has exceeded price inflation during the year, as well as the higher rate of growth experienced in medical admissions which yield a lower margin than surgical admissions. There has been continued focus on the cost base through various efficiency initiatives, including tight management of staffing, reduction in energy consumption, efficient procurement and automation of administrative processes. The savings delivered by these initiatives were, however, not sufficient to absorb the countervailing margin pressures.

Operating profit grew by 4.0% to R3 469 million (2015: R3 335 million) and was influenced by higher depreciation charges arising from the greenfield hospitals and brownfield beds added in 2015.

At 30 September 2016, the division had a total of 10 513 registered beds (2015: 10 421 beds). During the year, a further 92 beds were added to the portfolio, including the new 21-bed uMhlanga Eye Institute in KwaZulu-Natal, which only started operating in October 2016.

The Netcare Christiaan Barnard Memorial Hospital ("CBMH") will relocate and commence operations from its new, state-of-the-art premises on the Cape Town foreshore in early December 2016. This flagship hospital will form part of a world-class medical precinct and centre of excellence, the first of its kind in SA, providing a comprehensive range of primary, secondary and tertiary medical, emergency, diagnostic and rehabilitative services. The new Netcare CBMH will include 248 beds, 11 theatres, 2 cardiac catheterisation laboratories and an Accident and Emergency Trauma unit.

Primary Care

There was stable demand in general practitioner and dental patient visits across our national network of Medicross family medical and dental centres, while Prime Cure delivered a solid performance. Revenue was up 0.7% to R1 178 million (2015: R1 170 million) and EBITDA rose 6.3% to R118 million (2015: R111 million). The EBITDA margin improved from 9.5% to 10.0%.

Medicross has a large national day clinic network comprising 14 facilities, including a new day clinic in Kimberley which was completed in September 2016 and operations commenced in mid-October 2016. The division is focused on expanding its offering in the day clinic and sub-acute market. In this regard Medicross acquired a 16-bed sub-acute facility in Pietermaritzburg and a 20-bed sub-acute facility in Amanzimtoti during the year. Plans are in place for further expansion of our footprint in the provision of these services. In the 2017 and 2018 financial years, Medicross will be opening three new day clinics in Upington, Cape Town and Richards Bay, as well as three new sub-acute facilities in Hillcrest, Cape Town and Richards Bay.

Pharmacy outsourcing agreement

The outsourcing of Netcare's hospital retail front shop operations and the Medicross retail pharmacies to Clicks Group Limited ("Clicks") was approved by the Competition Commission and Competition Tribunal on 11 November 2016. Clicks will take over the 37 Medicross pharmacies on 1 December 2016 and the retail (front shop) pharmacy operations within 45 Netcare hospitals with effect from 1 February 2017. The dispensing of prescriptions in the hospital pharmacies does not form part of the agreement and will remain within the hospitals' operations. The arrangement with Clicks will enable Netcare to provide an enhanced retail offering to patients, consumers and other stakeholders. The outsourcing agreement will not have a material impact on the earnings or financial position of the Group.

Acquisition of Akeso Clinics

On 15 November 2016 the Netcare Board approved the proposed acquisition by Netcare of Akeso Clinics, which is a national group of 12 dedicated mental healthcare facilities comprising 873 beds. This transaction is subject to the usual regulatory approvals.

SA private healthcare market inquiry

The Healthcare Market Inquiry ("HMI") into the functioning of the private healthcare market commenced in 2014. Netcare has been actively engaged throughout the inquiry and made comprehensive submissions to the HMI panel in 2014, 2015 and 2016. The HMI is running beyond its initial deadline for completion of the inquiry. On 10 November 2016 the HMI advised that it intends publishing a series of documents during November and December 2016, which will be followed by a period for public comment, closing on 31 January 2017. An updated timeline for the release of provisional and final reports is expected on 1 December 2016.

United Kingdom

BMI's total patient episodes, comprising all inpatient, daycase and outpatient activity, grew by 3.2%. Within this, inpatient and day case activity grew by 1.1%. Growth in demand for National Health Service ("NHS") caseload continued increasing by 6.6% in total (in line with overall market trends), with strong demand increasing e-Referrals by 9.5%, offset by a 5.3% contraction in spot purchasing. NHS-funded caseload now comprises 41.6% (2015: 39.5%) of total inpatient and day case activity. While there was a 1.8% rise in demand in the Private Medical Insurance ("PMI") market in 2015, there has been a continuing decline in medical cover payouts to acute hospitals and clinics over the past 5 years. Private funded inpatient and daycase caseload continued to decline, albeit at a slower rate of 3.4%, due to ongoing funder cost management. Self-pay caseload increased 2.8% and is being driven through packaged pricing and targeted marketing campaigns. In line with global trends, a greater number of procedures and services are taking place in an outpatient environment and this area of activity grew by 3.7% in the year.

Revenue of £895.5 million was 1.1% higher than the prior year (£886.0 million), included within which was the continued shift in funder mix from private patients to NHS. EBITDA before non-recurring items declined by 0.3% to £63.8 million (2015: £64.0 million). In the current year there was a non-recurring credit of £2.6 million comprising a fair value gain of £0.6 million arising on acquisition of control of a former associate and the reversal of an impairment of £2.0 million. The prior year included net non-recurring costs of £8.8 million constituting business restructuring costs of £11.9 million offset by a £3.1 million fair value gain arising on acquisition of control of a former associate. EBITDA rose 20.3% to £66.4 million (2015: £55.2 million) and operating profit improved 71.9% to £28.7 million (2015: £16.7 million).

Capital investment, including intangible assets and the purchase of the remaining stake in an imaging joint venture, increased to £40.1 million (2015: £39.4 million) directed at both improving current hospital facilities and infrastructure and driving revenue generation.

General Healthcare Group PropCo 2 reported an increase in attributable earnings to £1.7 million (2015: £0.4 million), inclusive of a deferred taxation credit of £0.7 million arising from changes in the UK tax rate.

RPI swaps and UK Rent Transaction

BMI leases 35 of its hospital properties from various subsidiary entities of its major external landlord, Hospital Topco. The leases on these properties have annual rental uplifts linked to RPI. BMI also holds certain RPI swap instruments which, combined with the leases, achieve the economic effect of a fixed 2.5% rental uplift.

In October 2016 BMI and Hospital Topco agreed heads of terms for a potential transaction to reduce BMI's annual rent-related obligations. The parties remain constructively engaged in moving the deal to completion. A UK Rent Transaction will be subject to consent from certain lenders of Hospital Topco, as well as the refinancing of BMI.

It was recently disclosed that BMI is in the process of refinancing its existing debt facilities, inclusive of the funding required for the UK Rent Transaction. BMI reported gross debt of £167.9 million and net debt of £110.0 million at 30 September 2016. The proposed refinancing consists of: (1) a senior term loan facility of up to £285 million; (2) a revolving credit facility of up to £75 million; and (3) a second lien facility of £66 million in which Netcare would hold a contractual economic interest.

In terms of IFRS, the RPI swap instruments (related to the 35 property leases described above) are required to be carried at their fair market value at each reporting date. The valuation of these instruments is sensitive to future RPI expectations and also the expected timing and amount of any swap instrument termination payment. The future RPI rates used in the valuation of the RPI swap instruments have been based on future forecasts available in the market. The impact of the termination date was estimated using a weighted average of probabilities of the cash flows expected to arise at possible termination dates. However, as a consequence of the heads of terms agreed for the UK Rent Transaction, the estimate of the termination dates and amounts used in valuing the RPI swap instruments changed from the corresponding estimates applicable at previous reporting dates. The RPI swap instruments valuation as at 30 September 2016 of R2 129 million (£119.7 million) reflects the mark-to-market valuations by the counterparty to the RPI swap instruments.

Therefore, as a consequence of the UK Rent Transaction and as set out in note 5 of the summarised Group financial results, the Group recorded a significant non-cash fair value accounting charge of R1 988 million (£107.9 million), before taxation, in the year to 30 September 2016 in respect of the RPI swap instruments. As mentioned previously, given the exceptional nature of the RPI swap instrument fair value accounting charge, its impact has been separately disclosed and the commentary refers to normalized results exclusive of this non-cash charge.

In the period from 1 October 2016 to 31 October 2016, the mark-to-market value of the RPI swap instruments fell to R1 188 million (£72.1 million) reflecting movements in market expectations of future inflation indices.

Netcare Ltd. published this content on 21 November 2016 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 15 December 2016 12:25:31 UTC.

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