Red Flag Alert: Mediclinic Intl
This post is designed to put a human touch on some of the outputs from StockViews’ Dragonfly machine intelligence by giving more context to the reasons behind new accounting, governance or earnings quality Dragonfly red flags that appear as a result of fresh data from recent results.
Mediclinic operates over 70 hospitals in Switzerland, South Africa and the UAE alongside having a 30% stake in Spire Healthcare, which operates UK private care hospitals. As a result of measures introduced to combat COVID-19 these host countries have generally prioritising COVID patients over elective procedures, while safety measures have led to increased staffing costs. H1 has therefore been tricky with revenue falling 7% and EBITDA declining by >30%.
The reason Dragonfly has picked up Mediclinic is for a host of issues that are evident in its recently published H1 results. The accounting flags picked up are as follows and have led to a maximum 5/5 red flag overall:
- Long and short term DSO
- Capitalisation of software
- DPO
- DSI
We look in more detail at rising DSO signal below.
1. Rising DSO trend should be a serious concern
Generally Mediclinic records its revenue during the stay of a patient with the bundling of healthcare, treatment and stay costs with an invoice sent when the patient leaves hospital. As can be seen below — the extensive revenue recognition notes for just the Middle East division — there is considerable room for revenue recognition to be inaccurate due to incorrect assumptions on variable consideration from volume rebates but also disallowed claims (which seem to be a part of doing business in the UAE).
The reason we have focused on Middle East revenue recognition is that this division saw the biggest increase in DSO in 2020, although revenue recognition practices are similar in the South African and Swiss businesses too. These miscalculations can be significant however as this excerpt shows with a £32m bad debt reclassification.
What should be particularly concerning for investors is that while trade receivables have grown almost half of receivables are past due, while >90 day past due has grown from 16% of trade receivables in 2019 to 25% in 2020. At the same time the loss provision against these aged receivables has dropped significantly from a 14% loss allowance to just 11% in 2020.
Mediclinic’s receivable ageing profile in 2020
Mediclinic’s trade receivables have grown further in H1 interims
Sadly there is very little disclosure within the interim results to clarify this movement although the company notes:
“Cash flow conversion at 42% (1H20: 98%) was primarily impacted by lower receivables collections in Mediclinic Middle East compared with earlier in the period, exacerbated by the strong counter-seasonal performance in the second quarter period, increased debtors balances in Hirslanden”
