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Strategic Report:

Viability
statement

The assessment of viability is an extension of the risk management and annual financial planning processes which translate into each of the divisional business plans. The business plans reflect the current Group strategies and their associated risks and the Directors’ best estimations of their prospects. Fundamental to the assessment of the Group’s prospects is the long-term business model of quality service delivery and revenue growth under acceptable risk tolerance.

The annual financial planning process includes a detailed bottom-up approach per division for the budget year (performed by each clinic and hospital) and the extension of the key assumptions to the forecast period. The budgets are subject to review and, if necessary, re-budgeting. The five-year plans, including the strategic Group goals and objectives, are reviewed and approved by the divisional executive committees, the Group Executive Committee and the Board.

The Board has adopted a five-year time frame for the assessment, in line with the Group’s business planning period which largely reflects the impact of investments made in the present period. The five-year period extends beyond the maturities of a material portion of the Group’s borrowings in each division. Under current operating and market circumstances, as well as the existing levels of debt the assumption is that these borrowings would be refinanced broadly in line with the terms and conditions of the existing facilities.

The Group successfully refinanced Mediclinic Southern Africa and Mediclinic Middle East’s borrowings in August 2018 and September 2018 respectively. In Switzerland, an amendment to the financing agreement was entered into in March 2019, adjusting the covenants to reflect the impact of the recent regulatory changes on the profitability of the business.

The Audit and Risk Committee monitors the Group’s robust risk management process and system of internal control, as mandated by the Board (see report). The principal risks were identified by these systems and, for the purposes of the viability assessment, severe but plausible scenarios reflecting the risks that could impair the viability of the Group were identified for each of the divisions to form the basis for stress testing.

On a divisional level, the potential impact of each scenario and certain scenarios in combination were modelled and assessed on EBITDA or profit after tax (as appropriate), net debt and debt covenants over the five-year forecast period.

The principal risks and related key assumptions underlying each of the divisions’ business plans that were stress tested are set out below:

KEY ASSUMPTION STRESS TESTED PRINCIPAL RISK DIVISION STRESS TESTED
Reductions in tariffs and fees
  • Economic and business environment
  • Regulatory and compliance risk
Hirslanden
Mediclinic Southern Africa
Mediclinic Middle East
Reduction in volumes
  • Competition
  • Economic and business environment
  • Regulatory and compliance risk
Hirslanden
Mediclinic Southern Africa
Mediclinic Middle East
Deterioration in insurance mix
  • Regulatory and compliance risk
Hirslanden
Increases in interest rate
  • Availability and cost of capital
Hirslanden
Downturn in the macro-economic and business environment
  • Economic and business environment
Mediclinic Southern Africa
Mediclinic Middle East
Shortage and availability of qualified and experienced healthcare employees
  • Availability, recruitment and retention of skilled resources and medical practitioners
Mediclinic Southern Africa
Adverse regulatory changes
  • Regulatory and compliance risk
Hirslanden
Mediclinic Southern Africa
Mediclinic Middle East
Efficiency improvements and cost savings not fully realised
  • Operational and credit risk
Hirslanden
Investment in Group initiatives not being successfully implemented
  • Information systems security and availability risk
Hirslanden
Delays in expansion projects and disruptive impact of EHR rollout into busy established units
  • Information systems security and availability risk, including project delivery risk
Mediclinic Middle East
Deterioration in accounts receivable collection
  • Operational and credit risk
Mediclinic Middle East

This analysis showed that the business, in its geographically diverse portfolio, would be able to withstand any individual and certain combinations of the severe but plausible scenarios, ceteris paribus, by taking management action with the key mitigating steps being a reduction in discretionary investment, cost management initiatives, drawdown of overdraft facilities and improvement in net working capital days. The Directors therefore have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due, in the ordinary course of business, over the five-year period of their detailed assessment, ending in 31 March 2024. In making their assessment, the Directors have assumed that there will be no material change in the business and regulatory environments as such assumptions are subject to a level of uncertainty and judgment for which outcomes cannot be projected and foreseen.

Except for the covenant calculations which were based on the existing accounting framework (IAS 17), as this is the bases on which borrowing covenants have been agreed with the Group’s lenders, the analysis did consider the adoption of IFRS 16.

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