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Questor: keep buying Mediclinic as its key Middle Eastern arm continues to improve
An encouraging trading statement from Mediclinic last week means the shares have risen nicely since we tipped them in March. If all goes according to plan, there should be more to come from what could prove to be a highly profitable and cash-generative business.
Mediclinic operates in South Africa, Switzerland and the United Arab Emirates. Weak performance in the Middle East has hobbled financial and share price performance but the update from Danie Meintjes, the outgoing chief executive, hinted at fresh momentum here.
Sales at the operation in the second half were 6pc higher than in the same period a year ago and, even better, up by 12pc on the first six months of the year as a recruitment drive began to pay off, Dubai performed strongly and Abu Dhabi began to show signs of improvement.
Start-up costs associated with the opening of new hospitals in Dubai and Abu Dhabi may restrain margins but the company is developing a strong presence in what remains a long-term growth market.
While South Africa is trading ahead of expectations, regulatory changes and hefty investment continue to weigh on the Swiss operation, which runs 16 hospitals and four clinics, although planned cost savings should help.
Mediclinic’s balance sheet does bear £1.8bn in net debt but a 29.9pc stake in Spire Healthcare is worth around £285m at current prices, and interest cover was more than five times in the 2017 fiscal year, so there should be no undue cause for concern here.
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Investors can now await the full-year results on May 24, the arrival of the new chief executive, Dr Carel Aron (Ronnie) van der Merwe, on June 1 and an analysts’ meeting in Zurich on June 28 for future updates.
Improved performance at the Middle Eastern operation is key to the investment case so the recent update was highly encouraging.
Questor says: buy
Ticker: MDC
Share price at close: 686.4p
Update: Dignity
It is early days but Dignity, the funeral group, is looking less pallid after last week’s first-quarter trading update.
Management had suggested in January that 2018’s profits could halve, thanks to price pressure in the market and the need to offer cheaper, low-end services. Yet sales and profits in the first quarter came in broadly flat, helped by an 8pc increase in deaths across the country and only 15pc of sales coming from simpler services, rather than the expected 20pc.
The shares soared in response. The management team did its best, quite rightly, to restrain expectations but at least the strong initial showing will help to ease any fears that banking covenants would come under threat, as they might have done had profit estimates halved again.
That buys executives and investors alike some welcome breathing room and reduces the still-considerable risks associated with the stock. And lower risk can mean a higher valuation, as Questor seeks to regain some dignity with regard to this selection.
The shares will remain volatile but should be worth holding as this is a market where there will always be demand.
Questor says: hold
Ticker: DTY
Share price at close: £10.01
Update: GB Group
A strong full-year trading update last week pushed shares in GB Group to a new all-time high and left this column with a 90pc gain since our first look at the cyber security and identity verification specialist in autumn 2016.
Organic momentum looks strong and recent acquisitions seem to be bedding down well so the only issue to address is that of valuation.
A forward multiple of 36 for the 2019 fiscal year does not look like a bargain but the rating could prove deceptive, as it will rattle lower if forecast upgrades keep coming. GB Group remains a good long-term play in a very hot sector and should still appeal to momentum players and growth seekers.
Questor says: hold
Ticker: GBG
Share price at close: 505p
Russ Mould is investment director at AJ Bell, the stockbroker