CFO’s review

❝ A notable 2024 highlight was the Group's strong cashflow performance, driven by prudent capital management policies implemented since 2020.❞

While 2023 was impacted by various closure costs relating to the hospital consumables business and the correction of pharmaceutical trading after the pandemic, the medical scheme business continued to be consistent into 2024.

Notable highlights for the year included the resolution of the longstanding IT arbitration case against Medscheme, which was concluded in our favour with costs awarded. As expected, the other party exercised their right to appeal.

Our IT costs in 2023 were exceptionally high due to stability issues linked to network dependency impacted by load-shedding. The investments made in the 2023 year and first half of 2024 have ensured a stable platform for Medscheme to deliver seamless services to all its clients and members. The above was achieved with lower IT costs through contract renegotiations and integration with specific Sanlam IT platforms and processes.

The medical schemes started experiencing higher claims volumes during the year, returning to pre-COVID activity levels. This required more investment in case management and hospital event management skills, entailing the recruitment of many skilled nurses. The impact of this increased cost was experienced in the Medscheme SA performance, in which the costs increased in line with the client revenue increases. We are working on various projects to optimise these expensive skills through digitisation and appropriate workforce management.

From a trading perspective, the pharmaceutical cluster experienced fluctuating sales volumes and pricing effects, which it benefited from during the COVID period in 2021 and 2022. As government and competitors continue to drive medicine prices down, consumers benefit from lower prices. This has necessitated AfroCentric to focus on ensuring that it helps address the significant disease burden through a wide range of chronic medications and preventative treatments. The continued margin erosion in the pharmaceutical manufacturing and medicine delivery businesses prompted the Group to reassess the value of goodwill that was recognised on initial acquisition of these operations. As a result, impairments of R230 million were recognised at year end.

Another notable 2024 highlight was the Group's strong cashflow performance, driven by prudent capital management policies implemented since 2020. These policies focused on optimising capital expenditure, managing working capital, and applying central cash treasury management principles across all Group entities. As noted below, the Group generated over R460 million in operational cash, excluding acquisition activities. This cash performance will form a strong basis for the final calendar year dividend to be distributed with the December 2024 results.

Key highlights of the 2024 performance are set out below:

FIVE-YEAR VIEW

As noted on the previous page, the medical scheme administration business has been relatively stable over the past five years. However, the pharmaceutical cluster is trading at lower levels than in 2020, which required a review of the price paid for the investments.

The management team has focused on reducing its capital expenditure since 2019, especially IT development costs, by either expensing development or designing more agile solutions. This is starting to yield benefits with the retraction of both the depreciation and amortisation of intangibles' impact on profit and loss. The Group will continue to apply prudent capital management and adhere to value-for-money principles in its approach to future solutions.

Rising interest rates in 2022/2023 drove financing costs higher, especially given the additional acquisitions completed during the year under review. The impact was reasonably well absorbed, with a deliberate focus on working capital and treasury management.

MEDICAL SCHEME ADMINISTRATION, RISK MANAGEMENT AND TECHNOLOGY CLUSTER

The medical scheme administration, risk management and technology cluster, primarily comprising Medscheme, has consistently exceeded expectations in operating profit despite challenging market conditions. This is evident in the cluster's revenue growth, which contrasts with the anticipated decline due to concerns about medical scheme affordability for members. With limited growth in insured lives in South Africa, Medscheme has consistently retained its membership base in the four largest schemes we manage – Bonitas, Fedhealth, POLMED and GEMS. In the past 12 months, we have recorded net growth in both Bonitas and GEMS, which indicates the public's commitment to private healthcare benefits and the fact that the South African middle class has not been impacted too harshly by the reduction in employment.

The focus for Medscheme, being the primary subsidiary of the Group responsible for medical scheme administration, has been to build systems and processes of excellence. This entailed embarking on projects where teams competed on a "Single Service Measure," which enabled competition in the business units, resulting in improved customer service and turnaround time of transactions. The rollout of other digital enhancements in the member applications, such as WhatsApp communication and chatbots, has also driven more customer volumes to a digital platform that is 24/7 enabled and reliable. An improved hospital approval system linked to the major hospital groups in South Africa will further enhance the turnaround time, case management and payment cycles of hospital claims, thereby reducing transaction costs for this particular service.

Medical scheme activities and volumes are back to pre-COVID levels. We anticipate our implemented self-service and digitisation solutions will help us maintain margins comparable to previous levels.

PHARMACEUTICAL CLUSTER

This division is mainly dominated by two large subsidiaries: Pharmacy Direct, which delivers medicines to medical scheme members and Activo, a medicine producer selling directly into the open pharmacy market. Pharmacy Direct was successful in retaining its contract with the NDOH for medicine distribution to public patients. The impact of the new contract and related profitability is however less than previously anticipated and has impacted the company's net profit before tax. The Private business is also experiencing margin pressure with medicine prices increasing by less than inflation and in many cases decreasing due to competition. These factors have played a significant role in the Board's view on the future profitability of this service and decided to prudently impair the goodwill of the asset by R100 million.

Our medicine manufacturer Activo, experienced continued growth especially in the hospital and over the counter products. The company is however also impacted by the industry's continuous drive towards lower prices, and therefore its profitability is lower than in previous years. This lower profitability and continued margin pressure was assessed, and the Board decided to also impair the goodwill for the Activo/Forrester acquisitions by a combined value of R130 million.

CAPITAL MANAGEMENT

The Group has experienced some significant turnarounds in its balance sheet since 2015, with considerable cash on hand with the subscription of shares sale to Sanlam and the issue of additional shares that funded the initial pharmaceutical assets. Compared to a stable cash-generating medical scheme administration business, these new businesses have required the management team to look at ways to support growth. For this very reason, the Group has continued to rather fund acquisitions through debt since 2019, as no gearing was in place then, and the continued working capital needs are being monitored and reviewed weekly, with targets set for each unique business.

With the Sanlam acquisition of shares from current shareholders and subsequent "flip up" to listed shareholders (previously invested below listed company level), the impact on Share Premium, Retained Income and Non-controlling interest was material due to the size of the 28.7% shareholding that Sanlam had since December 2015. We now have all shareholders aligned at the same investment level. We will see consistent balance sheet performance going forward, with prudent capital management to support an increased return on equity in the future.

Optimising our capital structure while absorbing new acquisitive opportunities is a balancing act

The objective of matching capital expenditure incurred in IT development with amortisation is starting to pay off, and, therefore, the decrease in intangible assets is notable as we strive towards smaller intangible assets in the future, pursuing organic growth with our available resources.

The focus on net cash generation by the Group is evident in the 2024 results in which acquisition activities were funded through operational cash, as well as the reduction in net borrowing facilities.

The various businesses contribute towards a streamlined central treasury management process to optimise cash balances and reduce any financing costs. The normalised cash performance of the Group is set out below with the intended distribution of cash to various stakeholders per our new capital management policy and strategy for growth.

AfroCentric re-negotiated its borrowing facilities in line with a possible 30% debt to equity ratio. As at 30 June 2024, we have only recorded a 52% utilisation level excluding excess cash on hand.

CONCLUSION

The Group enjoyed significant growth from 2020 to 2022, while many other healthcare companies declined in revenue and operating profit. The need for the shareholder change was desired from the start of the Sanlam acquisition to bolster our product offering towards growing our medical schemes and delivering the most affordable healthcare for patients. These fundamental principles of placing our clients and their competitive products first will be the focus for growth into 2025 and beyond.

AfroCentric has a proven track record of acquiring and seamlessly integrating new businesses and products, providing customers with a continuous experience in healthcare services and products.

The optimal capital structure of equity, debt, and working capital, balanced by a reasonable dividend policy, has been concluded to ensure the sustainability of the Group's earnings and our shareholders' returns.

I would like to thank the Group Finance team for its dedicated hard work and commitment to consistently being innovative in supporting the Group from a financial and commercial level. We reap the benefits through long-term planning and guidance to the business.

Hannes Boonzaaier
Group CFO