Human nature is pretty much the same wherever you go and the new middle classes of Africa, Asia and Latin America have one thing in common – they want long and healthy lives.
In the early stages of economic development, that translates into sales of basic items, such as soap and toothpaste. But as incomes rise, people start to demand more of their healthcare system.
They demand drugs. They buy medical insurance. And you begin to see serious investment in healthcare facilities. For every 1% increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6%, according to Nobel winner Robert Fogel.
In Africa, one in three people is now middle class. And there is huge investment in a burgeoning healthcare industry. African Medical Investments (AMEI) spotted this opportunity, and came on to AIM in 2008 with a mission to build hospitals in Africa.
It was a very rocky start. But a new chief executive has taken the helm. And after speaking to him recently, I’m convinced that there is serious potential in this obscure penny share.
The bombshell that rocked AMEI
Everything went well for AMEI in the early days of its launch on AIM. Hedge fund Harbinger Capital saw the potential of the scheme and provided finance, new hospitals were built, and local dignitaries and ex-pats welcomed the chance to receive some decent medical treatment in modern facilities.
But in July of 2010 there was a bombshell: Dr Vivek Solanki, the chief executive and guiding force of the business was suspended “pending the outcome of an investigation into potential financial and administrative irregularities at its Johannesburg and Harare clinics”.
That was the end of Dr Solanki as far as AMEI is concerned. But the hospitals in Maputo, Harare and Dar es Salaam are still running, and now AMEI has a new chief executive, Peter Botha. His job is to improve the fortunes of AMEI, restore the faith of investors, and get the company’s growth back on track. And he phoned me recently to explain his strategy.
Mr Botha’s aggressive plan for recovery
The main problem, according to Mr Botha – apart of course from whatever Mr Solanki was up to – was that the hospitals were pitched at too high a level. They were too expensive, too exclusive and too up-market. According to Mr Botha “they were pricing themselves out of the market”.
One of his first moves has been to cut prices to the levels that prevail elsewhere. Next, Mr Botha has been signing contracts with insurance companies, since for expat workers it is usually the employer that pays the bills. The insurer provides cover to the employer, but for this he needs to agree a tariff for treatment with the health provider.
Mr Botha’s third priority is to fill the hospital beds. He told me that there has been too much emphasis on treating outpatients, leaving expensive hospital beds empty. By offering the basics – maternity, trauma and malaria – and straightforward surgery for tonsils and adenoids, for instance, those beds should be filled.
Then there is the matter of cost and productivity. Mr Botha wants to cut costs by 25%, which sounds a tall order, and he also wants to get more out of the doctors. A flaw in the business so far has been the payment of fixed salaries to doctors, so Mr Botha wants to pay them according to how many patients they treat.
To me this sounded strange, conjuring up visions of doctors hauling people off the streets to whip out their tonsils. But what Mr Botha in fact wants to see are more referrals made within the hospitals, so that any necessary treatment that is identified is performed on site.
In another enterprising move, Mr Botha is hoping to get cardiac equipment from an Indian supplier, with payment based on a percentage of turnover. Finally, he is renegotiating the lease on the hospital in Dar es Salaam. Will all of this be enough to get AMEI into profit?
AMEI could be a great target for takeover
Already he has improved the revenues of the Maputo hospital from $350,000 per month to $500,000, and that in Dar es Salaam from $150,000 to $250,000. Meanwhile, the newly opened hospital in Harare is bringing in $250,000 per month. Now that these are performing better, the plan is to expand the chain. A management contract for an existing hospital in Lusaka is one possibility, while Mr Botha also sees the chance to build a hospital in the Tete mining district of Mozambique, home of many foreign miners. Further out, Uganda, Nigeria and Ghana are attractive markets.
But before AMEI can embark on too many new projects, it may first have to raise some more money from investors. These backers will have to be prepared to give AMEI a second chance. But the prize, in a few years’ time, could be a group of eight-ten hospitals throughout Africa, that could make a tasty acquisition for a bigger player. I’ll be following this stock very closely in the months ahead.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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