Demand for quality health care in Southern Africa makes the sector an attractive place to invest

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The health care sector seems to be a a favourite in the South African market, with companies like Netcare and Life Healthcare trading well on the JSE, following firm results from the groups this year. Advanced Health is another company that recently listed on the JSE with much success. The business of providing health care in the country is certainly becoming a more appealing place for the investor, as the demand for quality, private health care increases. Another company that is operating with strong strategic intent in Sub-Saharan Africa is Lenmed Health, the company began humbly in Lenasia in 1984 and is still run by the family who started it. Despite it being a family-owned business, it is currently expanding its operations into Africa, and has not only boosted its assets by nearly 100% in the last year, it also had a very successful rights offer. The only downside is that it is in demand and a tough stock to get your hands if you're looking for it. Etienne Nel, from Equity Express discusses Lenmed from an OTC perspective – LF

ETIENNE NEL:  Lenmed obviously trades over-the-counter, using the Equity Express platform, but they actually have a very interesting story in that it is a community-based hospital group that was started in 1984.  It arose from a need for a – let's call it a clinic in the area – and what happened was that the community crowd funded this group initially.  In essence, it's grown from strength to strength over a 30-year period.  The CEO is a man named Prakash Devchand, and he was runner-up for Ernst & Young Entrepreneur of the Year last year or two years ago, so certainly a company that's worth looking at and has a fairly solid management team.

LUCY FERREIRA:   What I've noticed is that it seems to be a family company.  It was started in Lenasia in 1994.  It stayed in the family and they manage it with very close reins.

ETIENNE NEL:  Yes, they do.  Interestingly enough, just from a trading perspective, the shareholders tend to be quite emotionally attached to their shares, simply because as you say, it has such strong community ties.  What the company's started doing is it's embarked on an aggressive growth strategy up into Africa and some of the things that come from that is for example, in the last financial year we saw the company raising R110m through a rights offer.  That rights offer was one-point-three times oversubscribed.  In addition to that – and I think this is vitally important – they had 1000-1 share split.  Previously, the rights offer was done at R600.00 per share and following that, the split happened, effectively putting the rights cost at 60 cents per share, if you follow my drift.

LUCY FERREIRA:   Absolutely.

ETIENNE NEL:  Right now, that share price is trading at R2.05, so for the people who followed their rights, it's been a phenomenal return.

LUCY FERREIRA:   And they've seen those returns.  Something else that really stuck out for me was that the asset base of Lenmed has just increased in the last financial year, by 100 percent, so they now have R1bn in assets.  That's a huge growth jump and they really are moving into sub-Saharan Africa, Mozambique, and Botswana.  It seems like they're making acquisitions all over the place.  I'm wondering if you're watching that translate in the OTC market.  Are people noticing the value?

ETIENNE NEL:  Lucy, it's the old adage where buyers would buy a share for one reason only, and that's to make money.  As I said earlier, the guys who followed their rights at 60 cents are certainly deep in the money now.  Having said that though, we are seeing some fairly shrewd investors coming into the Lenmed register and starting to pick up stock.  The only downside of this story (if I may add a word of caution) is firstly, liquidity is fairly illiquid, compared to most of the other counters that trade on the Equity Express platform.  Secondly, they do have a very high level of debt.  I think the debt-to-equity ratio is around 18 percent, so quite aggressively geared on the debt side, but obviously, with R110m in cash flow and close on R97m in earnings coming through, it looks like they seem to have the cash flow to finance that debt burden.

LUCY FERREIRA:   They have the balance despite those high numbers.  I think it's interesting that it's a lower to middle-income focus.  They're not going for the high-income earners in the market.  They're looking at a market that I suppose as investors, we're not necessarily used to in the private medical space.

ETIENNE NEL:  Lucy, that's 100 percent correct.  Obviously, with the burgeoning middle-class, it's a huge growth market, and I think that speaks to the company's focus on its grassroots and its heritage – where it comes from.  Obviously, at the top end of the market, not everybody has the fancy medical aid schemes.  Some people do actually have the mid-range hospital plans etcetera, and I think it's a largely untapped market, so they're playing in a very interesting space.

LUCY FERREIRA:   They have quite a niche position there.  I see that there's been a recent spike, and you mentioned illiquidity in the share (and that's understandable on the base that it currently is), but there was a spike when it sort of went up to R3.50 and now it's down to R2.00 again.  Is there anything that you know of, that drove that?

ETIENNE NEL:  Not really, no.  Lucy, the shares are really quite tightly held.  We often have people phoning us and saying 'can we get a large line of shares' and it's honestly quite difficult.  I think its emotional commitment and as a result, the tradability is on the low side.  What tends to happen – because it's fairly illiquid – is that your mid-offer spread or your double tends to be quite wide.  That tends to lead to some fairly erratic price movements.  Sometimes guys would just, out of sheer desperation, say 'I really want the shares, so I'll happily pay up' or conversely, 'I really need the money' and then they hit the button and there's a 30 percent drop in the share price.  Right now, the shares are trading at R2.02.  The last traded price was R2.05 and then, the best sellers are R2.20 so that's a ten percent spread, which is quite wide.

LUCY FERREIRA:   It is wide.  It's just interesting that it does seem as though it's one of those companies that people want to hold onto, especially with its growth prospects.  It's one for us to watch in the future.

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