Today, Medicover reported Q2 results, and the performance was much stronger than what we expected in May, as the macro outlook looked gloomy. Then, we projected Medicover to take a much harder hit during the covid-19 crisis. But as societies opened, in June, Medicover showed signs of resilience. As we predicted yesterday, recovery will be faster, and we expect this year’s revenues to exceed last year’s levels at around EUR 860m.
This is based on the encouraging signs we are seeing: revenues since mid-May have picked up on levels above or close to the prior year.
For Q2, Medicover reported revenue of EUR 198m, while in May we expected a much more significant decline – to EUR 164m. The result for the quarter was EUR -8.5m, stronger than our expected loss of -27m. The result was positively impacted by a one-off reduction of operational costs of EUR 16.3m due to solidary salary cuts and some government help.
The medical provision cost was close to what we expected, EUR 150m versus our expectation of 148m. For Q3 and Q4 we calculate with medical provision cost close to Q1 levels, around EUR 180m.
We expected also EBITDA to decline much more dramatically, to EUR -38m, and Medicover delivered a much stronger result, a positive EBITDA of EUR 25.3m with a margin of 12.7%. This strong result was also because the company was revealed to be much more resilient and better insulated from the unprecedented lockdowns in its various markets than other similar companies, due to its diversified income streams and locations.
However, the net impact of covid-19 on revenues was still quite significant, EUR -53m, consisting of a 20m drop in diagnostics revenue, and 33m decline in healthcare services revenue.
Most importantly, Medicover’s two core markets, Poland and Germany held up quite well. Polish revenues – cushioned by the large share of funded (membership) subscription payments took only a 10% hit due to the loss of electable fee-for-service income in the clinics. The subscription model lost only about 11,000 members, which is very low given the severity of the crisis. This is also due to the government’s efforts to help companies and save jobs.
Germany, where diagnostic tests are mainly publicly reimbursed, consultations with doctors and the drawing of blood for tests continued, and revenues grew 9%, All other markets were negatively impacted by the crisis, with Ukraine declining most dramatically due to the fact that all tests are paid privately and people need to visit a blood drawing point (BDP) to be able to take the test. We believe that Ukraine still remains an important market for Medicover, and revenues will recuperate to Q1 levels in the coming months.
In Healthcare services, revenue grew by 1.7% to EUR 110.5m (we expected it to decline to 94m), with organic reduction of 8% due to decline in elective services such as dental, IVF, inpatient and out-patient care were significantly impacted, whilst the corporate healthcare model, emergency and maternity were stable. As we expected, Medicover has used this opportunity to expand its digital solutions and support its clients remotely. EBITDA grew by 20% in healthcare services to EUR18.4m, we expected a much weaker performance. In India (MHI) services for covid-19 patients have become an additional source of revenue. Members have remained stable, with only a minor negative movement quarter on quarter.
Diagnostic services revenue decreased by 7.2% to EUR 90m. We expected a much more severe decline to 70m. Fee-for-service revenues declined 11% and represented 63% of divisional revenue. Revenues declined significantly in all countries, except Germany, where they grew 9%. Divisional EBITDA dropped dramatically by 44% to 9.7m (17.3m) with a margin of 10.6% versus 17.8%. As margins are a function of volumes, a dramatic decline in volume reduces margins significantly – testing is a centralisation and volumes game.
The company has used the crisis to cut away dead wood – businesses which do not add value nor will do so in the future. It has also invested significantly in diagnostics capacity even increasing the number of BDPs in preparation of a second wave of covid-19 or the seasonal flu: Medicover has performed 200,000 PCR virus tests and 90,000 antibody tests and expects an uptick in demand with seasonal flu.
Medicover has a strong cash position, EUR 124m up from EUR 34.8 at year-end with strong operating cash flows. It has over EUR 350m in available liquidity, both cash and credit facilities. It has reduced loans payable net of cash to EUR 78m from EUR 240m due to the share issue in June that added EUR 142m net in cash. The company maintains its financial targets of organic revenue of 9-12% and EBITDA margin of 15.5-16.5%.
Our expectations for a V-shaped recovery published yesterday have been confirmed in today’s report. The company has proven again that it is resilient and the crisis was temporary and manageable: the diagnostics model in Germany and subscription model in Poland provide a solid core, while other, variable (electable) revenue sources in Poland, Ukraine, Romania and India provide pockets of growth.
Our valuation of the company remains unchanged, with a base case of SEK 127 per share. Based on our strengthened conviction in the company’s ability to deliver, however, we rise our bull case to SEK 150 per share and argue that it is excellently managed and a good option for investors looking for steady growth and recession resilience. We see the current stock price as an opportunity for these investors to build up a position.
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