Strategic Report: Financial Review

“Our commitment to shareholder value is measured using returns on invested capital, thereby focusing strategic deliberations on ways to improve returns on the Group’s invested asset base.”

Jurgens Myburgh
Chief Financial Officer


Mediclinic has a defined purpose to enhance the quality of life of our patients and a strategic objective to generate long-term shareholder value. These fundaments inform our daily operational activity and frame our financial strategy. We strive to make decisions that improve the quality of our business to drive sustainable, long-term value for the Group.

Mediclinic operates in an industry where the combination of growth and dynamic disruptive and regulatory forces create an opportunity for investment and collaboration. The Group has a well-invested asset base that is able to, by adopting technology and operating innovation, drive the business to improved asset utilisation while taking advantage of selective opportunities for value-adding growth.

Our commitment to shareholder value is measured using returns on invested capital, thereby focusing strategic deliberations on ways to improve returns on the Group’s invested asset base. We do this through, for example, improving efficiencies or the use of technology. Our commitment also informs the governance process around investment decisions, which follows a framework of mandated authority levels and required internal rates of return. The combination of improvements in asset utilisation and application of investment discipline is aimed at generating improved value for shareholders in the long term.


Group revenue increased by 4% to £2 870m (FY17: £2 749m) for the reporting period. In constant currency terms, FY18 revenue was up 3%. This was as a result of marginal revenue growth in Hirslanden and the Middle East and modest revenue growth in Southern Africa, compared to the comparative period.

Earnings before interest, tax, depreciation and amortisation (“EBITDA”) was 3% higher at £522m (FY17: £509m). Adjusted EBITDA was also 3% higher at £515m (FY17: £501m), with adjusted EBITDA margins declining from 18.2% to 17.9%. EBITDA was adjusted for the following exceptional items:

  • a past-service cost credit of £4m relating to a change in the Swiss pension fund conversion rate advised by an independent professional. The credit is not related to the current year performance of Hirslanden; and
  • a release of a pre-acquisition fair value adjustment to debtors of £3m in Mediclinic Middle East.

Adjusted depreciation and amortisation was up 5% to £145m (FY17: £138m) in line with the continued investment programme expanding the asset base to support growth and enhancing patient experience and clinical quality.

The Group recorded an operating loss of £288m in FY18 (FY17: operating profit of £362m). Adjusted operating profit increased by 3% to £370m (FY17: £360m). Operating profit was adjusted for the following exceptional items:

  • recognition of an impairment charge to Hirslanden properties. Non-financial assets are considered for impairment when impairment indicators are identified at an individual cash-generating unit (“CGU”) level. During the year, the CGUs in Hirslanden were tested for impairment. For one CGU in particular, the carrying value was determined to be higher than its recoverable amount and as a result an impairment charge of £84m was recognised in the income statement;
  • recognition of an impairment charge to Hirslanden intangible assets of £560m. In line with the requirements of IFRS, the Group performed an annual review of the carrying value for goodwill and other intangible assets. In Switzerland, the changes in the market and regulatory environment, that became evident during the annual financial planning exercise for 2019 and future years which was completed in the fourth quarter of FY18, affected key inputs to the review that gave rise to impairment charges against goodwill and indefinite life trade names of £300m and £260m, respectively. Hirslanden goodwill and indefinite life trade names were carried at £307m and £341m, respectively, at the previous year end balance sheet date of 31 March 2017. The impairment charge is non-cash;
  • accelerated amortisation of £23m relating to the rebranding of the Al Noor hospitals to Mediclinic;
  • release of unutilised pre-acquisition Swiss provision of £9m; and
  • a loss on disposal of certain non-core businesses in Mediclinic Middle East of £7m.

Adjusted net finance costs benefited from the refinance in Switzerland and were down 13% at £70m (FY17: £80m). The Group’s reported effective tax rate is significantly skewed by exceptional non-deductible expenses which include impairment of goodwill; impairment of the equity investment and accelerated amortisation. The rate is also affected by unrelievable losses on disposals of non-core businesses. Adjusted taxation was £64m (FY17: £58m) with an adjusted effective tax rate for the period of 20.8% (FY17: 20.4%). After adjusting for the amortisation of intangible assets recognised in the notional purchase price allocation of the equity investment, the FY18 income from associates was £2.8m (FY17: £12.4m).

The Group recorded an earnings loss of £492m in FY18 (FY17: earnings of £229m). Adjusted earnings increased by 1% to £221m (FY17: 220m). Adjusted earnings per share were 1% higher at 30.0 pence (FY17: 29.8 pence). Earnings were adjusted for the following exceptional items:

  • fair value gains on ineffective cash flow hedges of £4m (FY17: £13m) in Hirslanden;
  • derecognition of unamortised finance expenses of £19m following the refinance in Switzerland; and
  • recognition of an impairment charge on the equity investment in Spire of £109m. During the year, the Group performed an impairment test updating the key assumptions applied in the value in use calculation performed at 31 March 2017. In particular, the Group adjusted the value in use calculation for the guidance announced by Spire in September 2017 about the current financial performance and about the related impact on short- and medium-term growth rates and revisited other key assumptions in this context. As a result, an impairment loss of £109m was recorded against the carrying value.

EARNINGS Reconciliation


The Group uses adjusted income statement reporting as non-IFRS measures in evaluating performance and as a method to provide shareholders with clear and consistent reporting. The adjusted measures are intended to remove volatility associated with certain types of exceptional income and charges from reported earnings. Historically, EBITDA and adjusted EBITDA were disclosed as supplemental non-IFRS financial performance measures because they are regarded as useful metrics to analyse the performance of the business from period to period. Measures like adjusted EBITDA are used by analysts and investors in assessing performance.

The rationale for using non-IFRS measures:

  • it tracks the adjusted operational performance of the Group and its operating segments by separating out exceptional items;
  • non-IFRS measures are used by management for budgeting, planning and monthly financial reporting; and
  • non-IFRS measures are used by management in presentations and discussions with investment analysts.

The Group’s policy is to adjust, inter alia, the following types of income and charges from the reported IFRS measures to present adjusted results:

  • significant restructuring costs;
  • profit/loss on sale of significant assets;
  • past service cost charges/credits in relation to pension fund conversion rate changes;
  • accelerated IFRS 2 charges;
  • accelerated amortisation charges;
  • mark-to-market fair value gains/losses, relating to ineffective interest rate swaps;
  • significant impairment charges;
  • reversal of significant impairment charges;
  • significant insurance proceeds;
  • significant transaction costs incurred during acquisitions; and
  • significant prior year tax adjustments and tax impact of the above items.

EBITDA is defined as operating profit before depreciation and amortisation and impairments of non-financial assets, excluding other gains and losses.

Non-IFRS financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with IFRS. The adjusted measures used by the Group are not necessarily comparable with those used by other entities.

The Group has consistently applied this definition of adjusted measures as it has reported on its financial performance in the past as the directors believe this additional information is important to allow shareholders to better understand the Group’s trading performance for the reporting period. It is the Group’s intention to continue to consistently apply this definition in the future.


Mediclinic has a 29.9% investment in Spire.

Spire’s underlying performance for the twelve months to 31 December 2017 resulted in revenue increasing 1.0%, EBITDA decreasing 4.7% and the underlying EBITDA margin decreasing to 17.3%. Adjusted EPS (excluding exceptional and tax one-off items) decreased by 25.0%. Underlying inpatient and day case admissions declined 1.8% driven by PMI and NHS volume declines more than offsetting growth in self-pay.

Mediclinic’s investment in Spire is equity accounted. Spire reported profit after tax of £16.8m for Spire’s financial year ended 31 December 2017 (31 December 2016: £53.6m). Spire’s adjusted profit after tax for the year was £57.9m (31 December 2016: £76.6m). The principal differences related to a £28.7m provision for the potential cost of a civil litigation settlement against a consultant who previously had practicing privileges at Spire and a charge relating to a decision to cease the provision of radiotherapy services at the Spire Specialist Cancer Care Centre in Baddow (Essex). The exceptional items materially impacted Mediclinic’s FY18 equity accounted share of reported profit after tax from Spire. After adjusting for the amortisation of intangible assets recognised in the notional purchase price allocation of the equity investment, the FY18 income from associate was £2.8m (FY17: £12.0m). The underlying and adjusted measures referenced above have been extracted from Spire’s results announcement for the year ended 31 December 2017.

As previously disclosed, under the UK Takeover Code, Mediclinic is presumed to be acting in concert with a number of entities in which its major shareholder, investment holding company Remgro Limited (“Remgro”), has a direct interest of 20%. or more and/or other entities in which such investee companies (or their investee companies and so on down the chain) have an interest of 20%. or more. Some of these entities deal in listed securities during the ordinary course of their businesses.

On 6 November 2017, Mediclinic announced that it had become aware that two such entities (Kagiso Asset Management (Pty) Ltd (“KAM”) and Truffle Asset Management (Pty) Ltd (“Truffle”)) had acquired shares in Spire Healthcare Group plc (“Spire”) which, together with Mediclinic’s 29.9% interest, meant that the presumed concert party group held, in aggregate, shares representing over 30% of the voting rights of Spire. It was also announced that the UK Takeover Panel had ruled that the aggregate presumed concert party holding in Spire must be reduced to below 30%, through a sale of Spire shares by the entities or Mediclinic.

Following further discussions with the Panel, the Panel has agreed that the presumption of concertedness between each of KAM and Truffle, on the one hand, and each of Mediclinic and Remgro, on the other hand, has been rebutted, and consequently no longer requires any Spire shares to be sold in respect of those holdings.


Although the Group reports its results in pounds sterling, the divisional profits are generated in Swiss franc, UAE dirham and South African rand. Consequently, movements in exchange rates affected the reported earnings and reported balances in the statement of financial position. Exchange rate movements also had a significant impact on the statement of financial position. The resulting currency translation difference, which is the amount by which the Group’s interest in the equity of the operating divisions increased because of spot rate movements, amounted to £310m (2017: increase of £388m) and was debited (2017: credited) to the statement of comprehensive income. The main reason for the decrease was the weakening of the period end Swiss franc and UAE dirham rates against sterling.

Foreign exchange rate sensitivity:

  • The impact of a 10% change in the GBP/CHF exchange rate for a sustained period of one year is that profit for the year would increase/decrease by £12m (2017: increase/decrease by £14m) due to exposure to the GBP/CHF exchange rate.
  • The impact of a 10% change in the GBP/ZAR exchange rate for a sustained period of one year is that profit for the year would increase/decrease by £9m (2017: increase/decrease by £8m) due to exposure to the GBP/ZAR exchange rate.
  • The impact of a 10% change in the GBP/AED exchange rate for a sustained period of one year is that profit for the year would increase/decrease by £4m (2017: increase/decrease by £2m) due to exposure to the GBP/AED exchange rate.

During the period under review, the average and closing exchange rates were the following:


The Group continued to deliver strong cash flow and converted 90% (FY17: 98%) of adjusted EBITDA into cash generated from operations, impacted by accounts receivable build ups in Switzerland (billing process changes) and the Middle East (increase in credit sales in the final quarter) towards the end of the financial year. Cash conversion in FY17 has been adjusted because of a reclassification between cash flow categories with no impact on net cash. Refer to the basis of preparation in note 2 to the condensed consolidated financial information for an explanation of this reclassification.


Interest-bearing borrowings decreased from £2 030m at 31 March 2017 to £1 937m at 31 March 2018, largely due to closing exchange rate differences.

The cash and cash equivalents balance reduced predominantly because of the acquisition of Linde as well as expansion projects in the Middle East.


Property, equipment and vehicles decreased from £3 703m at 31 March 2017 to £3 590m at 31 March 2018. This included an increase of £223m on capital projects and fixed asset additions in line with the continued investment programme expanding the asset base to support growth and enhancing patient experience and clinical quality. In addition, the closing balance increased by £110m as a result of the Linde acquisition. In addition to the depreciation and amortisation charge, the balance was further reduced by the impairment charge of £84m recognised on properties in the Hirslanden division and the change in the closing exchange rate.

Intangible assets decreased from £2 156m at 31 March 2017 to £1 406m at 31 March 2018 due to the impairment of goodwill (£300m) and trade names (£260m) in the Hirslanden division. The accelerated amortisation of the Al  Noor trade name of £23m (FY17: £7m), reducing the balance to nil, decreased the closing balance further.

Adjusted depreciation and amortisation was calculated as follows:


Hirslanden provides defined contribution pension plans in terms of Swiss law to employees, the assets of which are held in separate trustee-administered funds. These plans are funded by payments from employees and Hirslanden, taking into account the recommendations of independent qualified actuaries. Because of the strict definition of defined contribution plans in IAS 19, in terms of IFRS, these plans are classified as defined benefit plans, since the funds are obliged to take some investment and longevity risk in terms of Swiss law.

The IAS 19 pension liability was valued by the actuaries at the end of the year and amounted to £4m (2017: £73m), included under “Retirement benefit obligations” in the Group’s statement of financial position. The decrease in the pension liability was largely due to increase of the discount rate from 0.55% to 0.75% as well as changes in actuarial assumptions.


The deferred tax liability balance decreased from £527m in the prior year to £467m at 31 March 2018. The impairment of the trade names and properties in Hirslanden led to the release of deferred tax liabilities of £55m and £13m respectively which caused the decrease in the deferred tax liability balance.


Adjusted net finance costs benefited from the refinance in Switzerland and were down 13% at £70m (FY17: £80m). Adjusted net finance cost was calculated as follows:


The Group’s effective tax rate changed significantly for the period under review to 1.1% (FY17: 20.8%), mainly due to exceptional non-deductible expenses which include the impairment of goodwill, impairment of the equity investment and accelerated amortisation. The rate is also affected by unrelievable losses on disposals of non-core businesses. Excluding these exceptional non-deductible charges, the effective tax rate would be 20.8% (FY17: 20.4%) for the year ended 31 March 2018. The higher proportional contribution to profits from the Mediclinic Southern Africa operations increased the effective tax rate.

Adjusted income tax was calculated as follows:


The Group is committed to conduct its tax affairs consistent with the following objectives:

  • comply with relevant laws, rules, regulations, and reporting and disclosure requirements in whichever jurisdiction it operates; and
  • maintain mutual trust and respect in dealings with all tax authorities in the jurisdictions the Group does business.

Whilst the Group aims to maximise the tax efficiency of its business transactions, it does not use structures in its tax planning that are contrary to intentions of relevant legislation. The Group interprets relevant tax laws to ensure that transactions are structured in a way that is consistent with a relationship of co-operative compliance with tax authorities. It also actively considers the implications of any planning for the Group’s wider corporate reputation.

In order to meet these objectives, various procedures are implemented. The Audit and Risk Committee has reviewed the Group’s tax strategy and related corporate tax matters.


At the end of October 2017, the elective refinancing of the Group’s Swiss debt was successfully completed. The refinanced Swiss debt funding comprises up to CHF2.0bn of property-backed facilities:

  • CHF1.5bn senior term loan facility with a partially amortising repayment profile over six years and priced at Swiss Libor plus a margin of 1.25%;
  • CHF0.4bn capex facility, priced at Swiss Libor plus a margin of 1.25%, but which could increase funding costs up to a maximum of Swiss Libor plus a margin of 1.65% at the time of drawing, depending on the loan-to-value at that time;
  • CHF0.1bn revolving facility, priced at Swiss Libor plus a margin of 1.25%;
  • the new financing results in future finance cost savings; and
  • the existing ineffective interest rate swap was settled at CHF5m and no new hedging was entered into for the time being.


The Group provides the following guidance for FY19, unless otherwise stated:

  • Hirslanden: In FY19, Hirslanden expects modest revenue growth supported by an increase in average bed capacity for the year, largely related to Linde. As a result of the regulatory and market trends more than offsetting the benefits of cost savings and efficiency initiatives, the FY19 EBITDA margin is expected to contract by around 100 basis points (“bps”) from the prior year. However, the EBITDA margin is targeted to gradually improve from FY20 onwards.
  • Mediclinic Southern Africa: FY19 revenue growth will be driven by an expected increase in bed days sold of 1-2%, largely as a result of an increase in productive days compared to the prior year, combined with tariff increases broadly in line with inflation. The medium-term EBITDA margin is expected to be broadly in line with recent years.
  • Mediclinic Middle East: In FY19, the Middle East division is expected to deliver revenue growth (adjusted for the adoption of IFRS 15) in the low double-digit percentage range reflecting the underlying operating performance of the business and additional bed capacity coming online in the second half of the year. The EBITDA margin of the existing operations is expected to increase by around 250bps and to continue improving year-on-year to around 20% in FY22. As a result of the early opening of Mediclinic’s Parkview Hospital and the updated schedule for the planned upgrade and expansion projects in Abu Dhabi, the ramp-up costs associated with these projects are expected to offset the margin of the existing business by around 250bps per annum between FY19 and FY21, reducing thereafter.
  • The Group’s capital expenditure budget, in constant currency, for FY19 is expected to increase by 18% to £289m (FY18: £245m). This comprises £102m in Hirslanden (FY18: £101m), £76m in Mediclinic Southern Africa (FY18: £62m), £110m in Mediclinic Middle East (FY18: £80m) and £1m (FY18: £2m) for Corporate. The increase is largely driven by expansion in the Middle East and an upgrade cycle in Southern Africa.


The Group’s dividend policy is to target a pay-out ratio of between 25% and 30% of adjusted earnings. The Board may revise the policy at its discretion.

The Board proposes a final dividend of 4.70 pence per ordinary share for the year ended 31 March 2018 for approval by the Company’s shareholders at the annual general meeting on Wednesday, 25 July 2018. Together with the interim dividend of 3.20 pence per ordinary share for the six months ended 30 September 2017 (paid on 18 December 2017), the total final proposed dividend reflects a 26% distribution of adjusted Group earnings attributable to ordinary shareholders.

Shareholders on the South African register will be paid the ZAR cash equivalent of 79.52400 cents (63.61920 cents net of dividend withholding tax) per share. A dividend withholding tax of 20% will be applicable to all shareholders on the South African register who are not exempt therefrom. The ZAR cash equivalent has been calculated using the following exchange rate: GBP1:ZAR16.92, being the five-day average ZAR/GBP exchange rate on Friday, 18 May 2018 at 3:00pm GMT Bloomberg.