The introduction in July of a new payment system in hospitals in Abu Dhabi, designed to steer patients more towards state-owned hospitals and away from private clinics such as those operated by Mediclinic International, is one of those known facts that the market really should have taken cognisance of, but it seems to be largely behind a 144p fall in the share price to 776p.
The shares are a notoriously volatile performer despite half of them being tradeable on the market. The company is one of the least well known in the FTSE 100, having been created in February by the reverse of Mediclinic of South Africa into the London-quoted Al Noor. It runs clinics in the United Arab Emirates, southern Africa and Switzerland and has a 29.9 per cent stake in Spire Healthcare, which does the same in the UK.
The company reports each division in its respective currency and then converts these into sterling. Revenues in the half year to the end of September were up by 27 per cent, but 16 percentage points of this was from the Al Noor acquisition. There are three main areas of uncertainty, spread across all three owned divisions.
One is that so-called Thiqa payment system in Abu Dhabi, which affects only a small proportion of the group revenues but whose effects are now clearer after the summer religious holidays. This and the need to change Al Noor’s business practices to bring them into line with the group accounts for a sharp fall in Middle East margins.
The second is a levy going through the Swiss system, very slowly, that would be imposed on private health companies. That is a negative, if a long way off. The third is attempts in South Africa to bring in an insurance scheme to cover patients. The effects of this are unquantifiable, and it may never happen.
Add to this the question mark over the Spire stake, taken to give access to a fourth health market. One day Mediclinic will probably buy the rest, and the lower pound should help a bit, but this is again uncertain.
Mediclinic’s main advantage is that it is in growth markets, especially in the Middle East where prosperity has brought about near-epidemic levels of all the diseases associated with it, such as diabetes brought about by obesity. The shares, on 19 times earnings, look fairly valued.
MY ADVICE Avoid
WHY The company is in growth areas in the market, especially in the Middle East and Switzerland, but that seems to be in the price
IMI
It is an achievement, if you serve markets such as US heavy vehicles, oil and gas and industrial automation, to make an earnings forecast in February and manage to reaffirm it nine months later.
IMI says that it will still achieve 52p of earnings this year despite a further slowing in revenues. That is before a kicker from sterling that will probably increase that figure to 60p. The company makes valves and other engineering products for the above markets and its third quarter numbers show a further reduction in underlying revenues in all three divisions.
IMI is responding by cutting costs where it can, amalgamating plants and being more efficient on inventories and cash. This explains its ability to maintain that target in the face of such challenging markets. It is in the middle of a programme to improve the business by introducing more sophisticated product lines and is probably outpacing its rivals. An earlier pledge to double profits by 2019 is probably going to need some considerable improvement in those end markets. Up 8p at 977p the shares sell on 16 times earnings and will probably require that market upturn to make progress.
MY ADVICE Avoid
WHY It seems too early to buy given challenging markets
National Grid
National Grid is one of those stocks that investors flock towards in uncertain times because it offers a guaranteed, inflation-proof dividend yield from regulated earnings, 70 per cent of them in the UK, that will not vary greatly from year to year. This is why almost all of its 900,000 investors hold the stock.
How to explain, then, the surprisingly erratic share price movement? The shares shot up after the EU referendum on that flight to safety and the benefit to those US earnings of the higher dollar, though this is not going to affect any future dividend increases which should continue to rise at least in line with inflation. They peaked at £11.30½ in July and then came back, losing 61½p to 944p yesterday on halfway figures that had no surprises and a 1.1 per cent rise in the halfway dividend.
The answer in part is that National Grid, as an income stock, is seen as correlating with the returns on bonds, such as US Treasuries, and, when these rise and the gap between them and the yield it offers narrows, some investors switch out of one into the other. This is a dubious investment strategy but it seems to apply. National Grid is about to sell its share of its UK gas distribution business. The £5 billion, maybe, that the sale will raise will be returned to investors. The sale may be worth in the range of £1 a share, and you can reckon this is baked into the price and will not have much effect.
On the other hand, the fall in the price has raised the yield to 4.3 per cent, which looks like a buying opportunity long term.
MY ADVICE Buy
WHY Fall in share price makes yield look attractive again
And finally . . .
In the spring Schlumberger, the giant US oil services company, walked away from the Fortuna gas project off Equatorial Guinea in west Africa owned by Ophir Energy. This is one of the most important assets the company has and the indications were that it might have to find another partner or go it alone. Ophir has just done a deal with Schlumberger and Golar, the liquefied natural gas shipper, to take the scheme forward. The project will cost $2 billion to get to first gas in 2020: Ophir’s exposure is limited to $150 million.