CFO's review

"A satisfying conclusion to a five-year growth initiative."

Hannes Boonzaaier

During August 2015, with the consummation of the Sanlam transaction and the purchase of the pharmaceutical subsidiaries, the new shareholders of the AfroCentric Group came together to develop a growth plan for the next five years. The financial objective was simple: grow earnings at a compound growth rate of 15% throughout the period. However, this objective would only be possible if the traditional administration business won substantial new clients and drove down its delivery cost to become more competitive.

Linked to the growth in the administration business was the need to provide more cost-effective medication while improving patients' health through enhanced adherence in order to make an impact on the total healthcare spend of members. These core principles later evolved into the the financial aspects on the following page, which required constant review:

Revenue diversification

The objectives discussed above came about as a result of the Group identifying the risk that we were becoming too dependent on medical scheme administration fees, which were not linked to the claims management the Group was performing to drive medical scheme premiums down. This risk derived from the revenue model that exists between administrators and medical schemes, which is based on a rate per member per month. The model does not compensate for the additional effort and costs incurred by the administrator in order to better manage medical claims costs.

The Group has, however, managed this risk by diversifying into other revenue streams by supplying medication and surgical products through our various subsidiaries, as well as entering into risk-sharing arrangements for several categories of medication expenses incurred by schemes.

While the Group was fully dependent on medical scheme revenue in 2015, at a base of R2 billion, during 2020, the Group recorded total revenue of R6.4 billion, of which the acquired pharmaceutical companies contributed 48% through organic and acquisitive growth. Even within the current crisis, we anticipate that the growth trajectory of these businesses will continue in 2021 and beyond, as a result of the enhanced need for chronic medication and adherence brought about by heightened patient awareness due to COVID-19.

Growth in pharmaceutical

Since the acquisition of Pharmacy Direct in 2015, the script count of medication supplied to patients has multiplied four times, from 2 million to 10.3 million during the 2020 financial year. This organic growth was primarily brought about by the successful implementation of the Department of Health Chronic dispensary contract for state patients, as well as selling the service to more private medical schemes in AfroCentric.

The state patient script count increased from just under one million in 2016 to eight million in 2020 due, in part, to a focus on enhancing the approval processes and registration of patients from all rural and state clinics onto the programme. Looking ahead, we believe that the script count volume could still be doubled due to the vast need in South Africa within the areas where state patients reside.

Activo Health, as a drug manufacturer, was always a critical element of the strategy to sell medication into the AfroCentric base but also other commercial pharmacies across the country. The first subscription of 26% of the shares was recorded in 2015, with the remaining 74% subscription completed in 2019. A profit warranty was linked to the acquisition price, based on the aggressive growth targets set by the Company in its price negotiations. To date, two years of the profit warranty have been concluded and, thus far, the targets are on track to match the cumulative net profit after tax envisaged with the acquisition.

Investment in IT

The Group required a refresh of our administration platforms, which entailed a four-year project that was completed in 2019, amounting to R210 million. These investments enabled the platform to seamlessly link new digital platforms and customer contact points into our vast database, which manages all medical scheme claims and clinical rules.

The last two years have seen an increase in spending on digital enhancements, which were rolled out during the COVID-19 lockdown period to drive a more digitally transformed organisation. Our interactions with various healthcare stakeholders, including members, brokers, healthcare suppliers and hospitals, among others, are now becoming more direct and less time-intensive in order to drive quicker point-to-point resolution and transactions. These platforms also supported the Group during the 2020 financial year to decrease our administration costs by 1% and, therefore, effectively gain a 6% benefit, if considered with the effect of inflation.

Driving startup ventures to profitability

To achieve our vision of total disruption of healthcare spend, we have also ventured into new endeavours that fulfil a niche need in the healthcare market. Below is the operating profit of a few of our new ventures, started in the past three years.

EssentialMed (Health Insurance) (R’m)   MMed (Surgicals/Consumables) (R’m)
Eswatini (Administration) (R’m)   Scriptpharm (Pharma Managed Care) (R’m)

additional considerations

Health insurance market impacted by regulatory uncertainty from December 2019   MMed benefited from PPE opportunities during COVID-19   Exiting the Eswatini market in 2020/2021   Scriptpharm 2020 results only include five months of the Bonitas chronic medication contract

Capital and working capital management

The Group continues to follow a prudent approach to capital management, as noted in the balance sheet tracking over the past five years. The Group continued to be in a net cash position with a solid dividend stream up to 2019 when it acquired some working capital loans to support our growing pharmaceutical business.

Debt repayment policies remain at less than five years, demonstrated by the large reduction in borrowing during 2020, in excess of R100 million. Working capital management has also been a focus as with the below cash conversion metrics implemented in the main subsidiary companies. With the focus on working capital and cash conversion, the Group has been able to reduce our working capital needs while simultaneously growing the retail cluster in excess of 50% concerning its operating profit.

(R’m)   (R’m)
Land and buildings

Medscheme purchase of office block in July 2019 – R77 million  
Intangible assets

  • Digital enhancements – R35 million
  • Hospital benefit management system – R41 million
  • Net development on admin platform – R57 million

Cash utilised to reduce borrowings.

Working capital needs comfortable range of R180 million to R200 million.
Net borrowings
R105 million capital reduction (max drawing R550 million) (debt repayments <5 years)
Cash conversion metrics
Inventory – PD 30 days, Activo 90 Days

Trade payables
Trade payables – 30 days from invoice

Trade receivables
Trade payables – Medscheme and PD 20 days (Schemes), Activo 50 days (Pharmacies)

Investor dashboard and five-year compound annual growth rates

The Group and management prides itself on the below dashboard, which concludes on the initial five-year objectives set by the newly combined shareholders in 2015. The 18% compound annual growth rate in comprehensive headline earnings and normalised headline earnings per share (HEPS) of 17% is a product of our focus on growing acquisitively while also prudently managing the financing of the acquisitions to ensure the creation of sustainable shareholder value. The focus with regard to the new initiatives has always been to grow them organically, as quickly as possible, by integrating them into the Group's larger membership base, client network and operating systems.

  Description 2015   2016   2017   2018   2019   2020   Five-year
growth rate
  Total Revenue (R'm) 2 098   3 148   3 785   4 213   5 297   6 440   26%  
  Operating Profit (R'm)* 372   376   564   613   677   875   16%  
  Group Operating Profit Margin (%) 18%   12%   15%   15%   13%   14%  
  Non-Controlling Interest (R'm) 25   53   102   128   115   155   48%  
  Normalised Headline Earnings (R'm) 180   177   244   264   275   313   11%  
  Comprehensive Headline Earnings (R'm) 205   230   346   382   390   468   18%  
  Normalised HEPS (cents) 38.26   30.84   44.03   47.63   49.13   54.63   17% (2016 - 2018)  
  Membership (lives managed) 3 098   3 589   3 634   3 674   3 714   3 754   4.6%  
  Scripts dispensed 2 033   4 187   6 428   8 697   10 262   X 4  
  Dividends (cents) 20   24   28   32   34   34   14%  
  Share price - 30 June (Rand) 5.15   5.25   6.20   5.70   4.95   3.69  
  Dividend Yield (%) 3.9%   4.6%   4.5%   5.6%   6.9%   9.2%  
  ROE (%) 15.4%   12.7%   13.7%   14.6%   13.3%   14.1%  
* Excluding IFRS 16 lease reversals since 2019.


This five-year journey has been both exciting and rewarding as we have sought to assemble the building blocks of our first level of healthcare integration with medical schemes and healthcare suppliers. During this time, several successful new ventures have contributed to our ability to meet our objectives while other less successful ventures have provided critical learnings that have not materially impacted on the Group's financial performance.

Going forward, the critical need to drive down healthcare costs for members and clients will continue to be at the centre of our activities and operational plans.


I would like to thank the AfroCentric Board for their continued support and guidance to the executive team, as well as the Group Finance function for consistently driving excellence in reporting and providing strategic advisory to all levels of the organisation.

Hannes Boonzaaier
Group CFO