Last year was a busy one for this end of the healthcare sector, confirming the City's suspicions that the market is ripe for consolidation. One of the defining events of the year was South African group Mediclinic's approach for Dubai-based hospital operator Al Noor (ALH). That irked Al Noor's closest rival, NMC Health (NMC), which also runs hospitals across several regions in the Middle East. NMC tried its best to come up with a counter offer that was good enough, but apparently to no avail: Al Noor and Mediclinic have recommended the combination to their respective shareholders.
What Mediclinic managed to do was simply draw attention to the 30 per cent stake that its largest shareholder, Remgro, has in London-listed Spire Healthcare (SPI). Between them, Remgro and Mediclinic's intent is clear: they want to grow the group's global portfolio of companies outside of South Africa, and they could make a bid for the British hospital operator at some point. In the short term, that seems unlikely as the Al Noor tie-up hands it a much-desired London market listing. But Spire would be a cheaper buy than Al Noor, so there's reason for Spire shareholders to hope for a deal at some point.
There's been speculation surrounding a possible bid for US orthopaedics group Smith & Nephew (SN.). Whether that will finally happen seems less and less likely - reflected in a share price that's spent much of the past year behaving fairly erratically. It seems chief executive Olivier Bohuon is focused on the job at hand instead, setting about reframing the company as an acquirer rather than a target. Smith & Nephew bought surgical robotics company Blue Belt Technologies last October for roughly £180m to help it expand into robotics-assisted surgeries.
Market sentiment is also behind healthcare services provider UDG Healthcare (UDG). We advised buying shares at 526p last summer and momentum continues to build ahead of significant regulatory changes to the way drugs are packaged and serialised, both in the EU and the US. Through its Sharp packaging division, UDG is well-placed to benefit from these changes having reshaped its business in line with the changing regulatory landscape. This has involved selling off three Irish pharmaceuticals distribution businesses - United Drug Supply Chain Services, United Drug Sangers and TCP - and its UK-based travel healthcare business, MASTA. The latter was offloaded to Lloyds Pharmacy owner McKesson, which is looking to expand its European arm.
| Company | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| Al Noor Hospitals | 1,145 | 1,338 | 17 | 1.1 | 23.8 | Hold, 1,178p, 14 Oct 2015 |
| NMC Health | 777 | 1,443 | 29.9 | 0.7 | 64.7 | Hold, 724p, 26 Aug 2015 |
| Smith & Nephew | 1,107 | 9,924 | 27.8 | 1.8 | -7.1 | Hold, 1,157p, 30 Jul 2015 |
| Spire Healthcare | 308 | 1,234 | 15.5 | 1 | -4.2 | Buy, 383p, 22 Oct 2015 |
| UDG Healthcare | 547 | 1,344 | 27.2 | 1.4 | 36 | Buy, 529p, 26 Nov 2015 |
Favourites
Over the course of 2015 we identified Spire Healthcare and UDG as our two picks from this sector. The first has real takeover potential from Mediclinic and its largest shareholder Remgro, while UDG is poised to capitalise on changing regulation in its field.
Outsiders
The Middle Eastern hospital operators were market darlings when they arrived on the scene, but concern is mounting as competition intensifies across the region. For that reason we're putting NMC Health as our outsider for 2016. It's curious to think Mediclinic saw Al Noor as the more attractive operator to take over, although this might be down to a more depressed share price at the time of the deal. NMC's reputation as an acquirer has arguably suffered damage from failing to snatch Al Noor back from Mediclinic, too.
