- Following the trading statement on 30 August, the FY 24A results held few surprises as AfroCentric had already indicated a mixed performance across its segments: Revenue growth was muted at +1% YoY, while operating profit rose by +2%, leading to a slight margin expansion to 7.6%. HEPS improved by +11% YoY to R 0.40 per share, in line with guidance of +6% to +16% YoY.
- Strong cash flow generation was the standout positive from the 2024 results: After adjusting for dividends (R93mn) and acquisitions (R131mn), net cash generated increased by R469mn. Looking ahead, management has signalled that approximately R59mn will be used to settle short-term debt, with R100-150mn allocated for growth initiatives. This suggests a remaining runway of around R260-310mn available for shareholder distribution.
- The Administration business, which contributed 76% of operating profits, saw rising servicing costs, with total operating expenses up +6% YoY, outpacing revenue growth of +5%: Strong growth was noted across public and private schemes, with total managed lives increasing by +4% to 4.01mn in FY 24A. GEMS led this with +6% growth, now representing 58% of total lives managed. However, AfroCentric Distribution Services was unable to retain the Bonitas sales, marketing, and distribution contract from September 2024, and the remaining administration services for Bonitas’ BonCap option will transition out of Medscheme by January 2025. Combined, these would reduce FY 24A EBITDA by around 5%, equal to R40-45mn.
- Profitability in the Healthcare Retail business (24% of operating profits) remains under pressure: After adjusting for the closure of the Mmed business, revenue increased by just +1% YoY, while operating profit declined by -1%. Impairments of R230mn (equivalent to R 0.27/share) were recorded, largely due to unfavourable price adjustments in key product lines, with ongoing pressure expected in the medium term. Furthermore, the anticipated benefits from new pharmaceutical product lines have not materialized as initially expected.
- While profitability has softened from the highs of FY 21-22A, AfroCentric achieved record free cash flow in FY 24A: The group has steadily reduced total capital expenditure from a peak of R524mn in 2018 to R261mn in FY24A. Going forward, AfroCentric plans to continue investing in IT infrastructure upgrades and data capabilities, with a cautious approach to capitalizing development costs. Based on this, amortization is expected to decrease further, while asset depreciation will likely remain around R90-100mn due to planned infrastructure refreshes.
- Gearing well managed, with significant headroom: AfroCentric’s strong cash generation led to a 47% YoY reduction in net debt, bringing it down to just under R300mn, with a net debt/EBITDA ratio of 0.4x. The Nedbank credit facility, now standing at R1.2bn, was restructured and extended through to March 2025. Currently, borrowings account for only 52% of the total available facilities.
- AfroCentric did not declare a final dividend, as it prepares to align its year-end with Sanlam’s: A new dividend policy has been introduced, with dividends now to be declared annually, meaning the next payment is expected in May 2025. While management estimates R260-310mn will be available for distribution, we believe this provides a sustainable foundation for dividend growth from the R0.22/share base (R 0.11 interim dividend annualised).
- AfroCentric anticipates further margin pressure as it transitions to a 31 December year-end: Pharma profitability is under close watch, while the Admin business will prioritize managed care and claims control. At the same time, it plans to invest in initiatives aimed at growing and retaining scheme membership.
- AfroCentric continues to trade at a significant discount to its intrinsic value, with the current share price reflecting a more than 30% discount to NAV (R 4.04/share): The stock is trading at a one-year forward EV/EBITDA of less than 2.5x, representing a 29% discount to its historical average of 3.5x. Based on our estimates, AfroCentric is also offering a one-year rolled forward dividend yield of approximately 8%.
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