Strategic Report: Divisional Review UNITED ARAB EMIRATES
David Hadley
Chief Executive Officer: Mediclinic Middle East

CEO’s statement

“Following the challenges faced by the Middle East division last year, we are succeeding with the turnaround of the Abu Dhabi business and laying the foundation for long-term, sustainable performance. We reached an inflection point this year in Abu Dhabi driven by the successful implementation of business and operational alignment initiatives, an improved regulatory environment and better-than-expected results from the new Mediclinic Al Jowhara Hospital and Mediclinic Al Yahar Clinic in Al Ain. The Middle East division is entering a growth phase underpinned by continued strong performance in the established Dubai business, significant improvement in the Abu Dhabi business and the planned opening of several new facilities over the coming years. In Dubai, the 182-bed Mediclinic Parkview Hospital is progressing ahead of schedule and is now expected to be commissioned in October 2018.”

Key financial and operational highlights

Mediclinic Middle East, as at the end of the reporting period, operated 6 hospitals and 22 clinics with a total of 748 beds and 5 801 employees (5 830 full-time equivalents). Mediclinic Middle East is one of the leading private healthcare providers in the UAE with the majority of its operations in Dubai and Abu Dhabi (including Al Ain). Mediclinic Middle East accounted for 22% of the Group’s revenues (FY17: 24%) and 16% of its adjusted EBITDA (FY17: 15%).

After reaching an inflection point, second half revenue in the Middle East division increased 6% comparatively and 12% sequentially. Continued strong delivery in Dubai was supported by a significantly improved operating performance in Abu Dhabi with Mediclinic Al Jowhara Hospital and Mediclinic Al Yahar, which opened in Al Ain during the prior year, exceeding expectations. FY18 revenue increased by 1% to AED3 134m (FY17: AED3 109m). Inpatient and outpatient volumes were up 3.3% and down 9.7% respectively in FY18, impacted largely by the business and operational alignment initiatives and non-core asset disposals in Abu Dhabi.

The former includes strategies to actively migrate away from Basic to Thiqa (health insurance for UAE nationals) and Enhanced insured patients in Abu Dhabi and to invest in higher acuity inpatient services, generating higher-quality revenue and margin improvement.

Following a strong second half operating performance, FY18 adjusted EBITDA increased by 9% to AED397m (FY17: AED364m). The adjusted EBITDA margin was ahead of expectations, increasing to 12.7% (FY17: 11.7%). The ongoing efficiency and cost-management initiatives implemented since the combination in February 2016 is expected to support margin improvement in the Middle East operating division as revenues increase.

In line with guidance, a provision for trade receivables impairment of AED88m (FY17: AED113m) was charged to the income statement. This represents 3% of Middle East revenue where the practice of disallowances is common. This matter receives ongoing attention as part of the revenue management cycle improvement programme. The Group will adopt the new IFRS 15 accounting standard (Revenue from Contracts with Customers) from 1 April 2018. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled to in exchange for transferring goods or services to a customer. Whilst this will not have an impact on the Middle East division’s EBITDA, certain operating expenses will be reclassified and set off against revenue in future periods. Further disclosure is contained in the notes to the accounts.

Depreciation and amortisation increased by 22% to AED256m (FY17: AED210m), mainly due to accelerated amortisation of AED107m in relation to the Al Noor trade name, resulting from the rebranding exercise that commenced in February 2017. This asset has now been fully amortised and the charge is excluded from adjusted earnings. Depreciation increased due in part to the opening of the new North Wing at Mediclinic City Hospital in Dubai and the Mediclinic Al Jowhara Hospital in Abu Dhabi during FY17. Operating profit was AED122m (FY17: AED134m).

Net finance costs increased by 9% to AED34m (FY17: AED31m) due to the June 2016 increase in debt facilities by AED567m (of which AED220m remains undrawn) to refinance the Group bridge loan facility fund expansion projects. The division contributed £44m to the Group’s adjusted earnings (representing 20%) compared to £33m (representing 15%) in the prior year.

The division converted 74% (FY17: 121%) of adjusted EBITDA into cash generated from operations. The decline was largely due to the significant increase in revenue in the final quarter.

Investing in a dynamic and growing market

Mediclinic Middle East is succeeding with the turnaround of the Abu Dhabi business, laying broader foundations for growth in the region. In February 2017, the important strategic decision was taken to rebrand the Abu Dhabi business to Mediclinic. This exercise was successfully completed at the end of 2017 and has started to deliver the desired effect of enhancing the brand reputation and recognition of the Mediclinic hospitals and clinics in Abu Dhabi. Whilst doctor recruitment continues, supporting the growing business, vacancies have normalised compared to the prior year, and the focus has shifted to supporting doctors to grow their patient activity. This included the roll-out of a new remuneration policy, similar to that established in Dubai, that is fundamentally based on doctors’ professional services and the quality of care provided. Aligned with this strategy is the target in Abu Dhabi of increasing the ratio of inpatient volumes, similar to that in Dubai, through the continued investment in doctors, services and facilities. The divestment strategy was concluded during the year, with the successful sale of five clinics and closure of four others that were considered non-core.

Since the Thiqa co-payment requirement in Abu Dhabi was removed in April 2017, the business continues to see an improving trend in Thiqa patient activity. FY18 Thiqa inpatient and outpatient volumes in Abu Dhabi increased by 83% and 38% respectively compared to the prior year. The removal of the Thiqa co-payment has enabled the business to accelerate its strategy of migrating activity away from Basic, towards Enhanced and Thiqa insured patients. In January 2018, the strategy was fully implemented at Mediclinic Airport Road Hospital, resulting in a revenue uplift for the fourth quarter, despite a drop in volumes. In Abu Dhabi, the business expects the positive momentum in higher tariff patient volumes to continue to grow in FY19, as the recently appointed doctors increase their patient activity.

The Middle East division is now entering an expansionary phase that is expected to drive an increase in revenue and improvement in EBITDA margins over time. In Abu Dhabi, the growth will be driven by an improved operating performance in the existing business and strategic expansion projects at the Mediclinic Airport Road, Mediclinic Al Noor and the new Mediclinic Western Region hospitals. In Dubai, the ongoing performance of the existing business will be supported by significant growth from the new 182-bed Mediclinic Parkview Hospital. Recruitment of doctors and staff for the new hospital is on track to support the 100 beds that will initially be opened before ramping up to full bed capacity over some three years.

During the year, Mediclinic Middle East invested AED358m on expansion capital projects and new equipment and AED31m on the replacement of existing equipment and upgrade projects. The major component of the expansion capital expenditure was the Mediclinic Parkview Hospital project in Dubai. Construction of the new 182-bed Mediclinic Parkview Hospital, the seventh hospital in the Middle East operations, is progressing well and is ahead of schedule, expected to now open in October 2018. Other expansion capex in FY18 included projects at Mediclinic Airport Road Hospital, Mediclinic City Hospital, Mediclinic Al Ain Hospital and Mediclinic Khalifa City. In September 2017, the Electronic Health Record (“EHR”) project, Mediclinic International’s largest ever IT investment, was launched in conjunction with InterSystems. A team of some 200 members of staff, are currently engaged in the project design process. The EHR will be systematically rolled out across the Mediclinic Middle East division during FY19 and FY20. The EHR is expected to deliver seamless care and improved service quality for patients as well as improved administration efficiency for the division.

In FY19, Mediclinic Middle East expects to invest AED455m and AED84m on expansion and maintenance capex respectively. During the year, ground floor and mezzanine renovations at the Mediclinic Al Noor Hospital will be carried out with expected completion of the work by the end of 2018. Looking further ahead, as part of the division’s expansionary phase, the Mediclinic Airport Road 100-bed expansion and cancer centre project has been further re-configured with work commencing imminently ahead of an expected opening in 2020. The project to construct a new 40-bed hospital in the Western Region of Abu Dhabi, which was postponed last year, has been re-initiated with project planning currently underway. A review of the long-term options to enhance the Mediclinic Al Noor Hospital is ongoing with the expectation that a decision will be made in the third quarter of 2018.

In May 2018, Mediclinic Middle East completed the acquisition of the Dubai based City Centre Clinics Deira and Me’aisem from Majid Al Futtaim, the leading shopping mall, retail and leisure pioneer across the Middle East and North Africa. Under the terms of the agreement, Mediclinic Middle East will acquire City Centre Clinic Deira, a large outpatient facility which opened in 2013 with two day-care surgery theatres and 18 medical disciplines, and City Centre Clinic Me’aisem, a smaller community clinic focusing on six core disciplines. The clinics serve strategic geographic locations and offer the opportunity to refer higher acuity inpatient cases to existing Mediclinic Middle East hospitals and the forthcoming Mediclinic Parkview Hospital. Significant potential also exists to attract additional doctors and over time to grow patient volumes and revenues as well as allowing Mediclinic Middle East the opportunity to partner with Majid Al Futtaim in the future.

Regulatory update

The division continues to maintain an active dialogue with government authorities on regulatory changes within the UAE healthcare sector. Preparations are ongoing for the implementation of Diagnosis Related Groups (“DRG”) in Dubai which is now expected to be implemented in early 2019 with Mediclinic commencing a shadow billing process in February 2018. The Dubai Health Authority (“DHA”) is following a collaborative approach in the design and implementation of the DRGs and in addition to sharing and discussing the test version of the DRG methodology with the market, they also shared hospital level results and impact studies. Currently it is expected that the DRGs will have a revenue neutral impact on the division, as prescribed by the DHA. At the end of January 2018, the DHA also announced they are in the process of developing a comprehensive Dubai Healthcare Facilities Performance Framework in collaboration with IBM Watson, which will contain clinical and financial key performance indicators.

During the year, Mediclinic was privileged to be invited by the Department of Health in Abu Dhabi to join its healthcare advisory board. There were some significant changes to the regulatory environment in Abu Dhabi at the start of the year. On 26 April 2017, His Highness Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, ordered the waiving of the 20% Thiqa co-payment when receiving treatment at private healthcare facilities in Abu Dhabi, with immediate effect. This rule had been in place since 1 July 2016, substantially impacting the division. At the same time the 50% co-insurance applicable for the Thiqa plan for the cost if patients sought medical services outside Abu Dhabi (including Dubai and the Northern Emirates) was reduced to 10%. In Dubai, UAE nationals are covered under the ENAYA and SAADA health insurance programmes, under the supervision of the Dubai Health Authority, with a 10% co-payment for inpatient and outpatient services in the public and private sectors.

The Gulf Corporation Council Value-Added Tax (“VAT”) framework agreement was published in April 2017 and subsequently in August 2017 healthcare was confirmed as a zero-rated service. Mediclinic completed its VAT registration ahead of the 1 January 2018 implementation of the tax.

Market overview

The Middle East remains a long-term growth market for the provision of high-quality private healthcare services, driven by a growing expatriate market and ageing local population facing an increased incidence of lifestyle-related medical conditions and a maturing regulatory environment which is increasingly focused on quality and clinical outcomes measures. Mediclinic has confidence in its Middle East growth strategy, which includes the opening of new hospitals and clinics in addition to expansion and upgrades to existing facilities.

Within the region’s healthcare market, government authorities remain heavily involved in the private sector and continue to introduce controls in order to reduce levels of over-servicing and utilisation, which are still prevalent in some areas of the market and to focus on quality performance and outcome measures. The senior management of Mediclinic Middle East continues to forge ever deeper relationships with the authorities to ensure Mediclinic remains an integral part of the healthcare delivery system in the region.

Outlook

The economic outlook for the UAE is more positive for 2018 and 2019. This is premised on greater stability in the oil price, increased government expenditure likely as Expo 2020 draws closer, non-oil revenues increase from new forms of direct and indirect taxation and a predicted rise in foreign trade. Economically, there is still opportunity for greater diversification away from hydrocarbons in Abu Dhabi than in Dubai, which in turn can create new opportunities for the private healthcare industry. Mediclinic’s strategy to reduce reliance on the low-priced insurance sector in Abu Dhabi has proved successful and will continue to be rolled out.

With the operational integration following the combination now largely complete and the focus now on bringing newly opened facilities to capacity and ensuring timely delivery of projects under construction, Mediclinic Middle East is now well positioned to consider further appropriate opportunities for growth.