CFO’s review

We persevered through several headwinds in 2024 by carefully monitoring and responding to setbacks while reinvesting in our core operations and the refreshed strategy to unlock sustainable long-term value for our stakeholders.

From a trading perspective, the Group navigated a challenging operating environment in which the medical scheme administration, risk management, and technology and pharmaceutical clusters were impacted by contract losses in our managed healthcare, marketing, and pharmaceutical lines of business. While the medical scheme administration, risk management, and technology cluster managed to sustain marginal revenue growth 2%, the pharmaceutical cluster contracted by 6.6%, which resulted in a net decline in Group revenue.

Medical scheme claims ratios remained relatively high compared to 2023, returning to pre-COVID activity levels, with an increasing prevalence of mental health admissions. This necessitated increased investment in case management and hospital event management skills, entailing the recruitment of many skilled nurses and clinicians.

The medical scheme administration, risk management, and technology cluster’s operating performance was satisfactory and aligned with expectations, balancing short-term profitability with upskilling our staff base and securing resources with scarce and critical skills (R67 million). We also strengthened key capabilities through strategic appointments. Additionally, IT system stabilisation was achieved by investing in Medscheme’s core system infrastructure and deepening collaboration and integration with Sanlam’s IT system environment (R38 million).

Several headwinds arising from adverse pricing effects, channel losses, and competitive pressures were experienced in the pharmaceutical cluster. These pressures necessitated a further review of goodwill attributable to the initial acquisition of AfroCentric’s pharmaceutical businesses. As a result, an impairment loss of R218 million was recognised in the income statement, which was the primary reason for the reported loss recognised for the period.

While the year was challenging, the Group persevered through several headwinds in 2024 by carefully monitoring and responding to setbacks while reinvesting in our core operations and the refreshed strategy to unlock sustainable long-term value for our stakeholders.

Notably, AfroCentric continues to convert most of its earnings into cashflows, driven by our core business model and supported by prudent capital management policies implemented since 2020.

Key highlights of the December 2024 performance are set out below:

Medical scheme administration, risk management and technology cluster

The medical scheme administration, risk management and technology cluster, primarily comprising Medscheme, has historically delivered stable, consistent earnings at an operating profit level despite challenging market conditions. Despite operating in a slow growth market, where the affordability of healthcare restricts growth in insured lives, we still managed to grow our membership base to over 4.08 million lives covered (3% increase), with a pleasing contribution of over 115 00 net new members from our public sector scheme clients, partially offset by a net decline in private scheme membership (primarily related to the loss of the Boncap option).

The medical scheme administration, risk management, and technology cluster was also negatively impacted by the termination of the Bonitas marketing contract, which had a secondary impact on TendaHealth, which was impaired to Rnil¹.

In line with our strategic ambitions of strengthening our managed care leadership position through clinically driven innovation and by leveraging the benefits of data and technology, we reinvested a substantial portion of our earnings into our digital (data centre migration), actuarial and clinical capabilities (clinical staff), primarily funded from our operating cash resources. While predominantly intended to reposition and improve the Group’s medium- to long-term competitive offering and operational efficiencies, it is encouraging to note the significant early gains Medscheme has already achieved in improving its service delivery model.

These include the rollout of:

• Digital enhancements in member communication applications, such as WhatsApp and online chatbots
• An improved automated hospital approval system linked to the major hospital groups in South Africa, enhancing the turnaround time, case management and payment cycles of hospital claims, thereby reducing transaction costs for this particular service

Our intentional investment into these capabilities was the primary driver for the decrease in operating profit and margins experienced in 2024 as we pursue a more differentiated and modernised operating model in support of the refreshed strategy.

¹ An impairment loss of R1.2 million was recognised for the TendaHealth goodwill.

Pharmaceutical cluster

This division comprises three linked but separate businesses, namely:

• The courier business – Pharmacy Direct, which delivers medicines to medical scheme members and the public through a partnership with the NDoH
• The pharmaceutical business – Activo, a medicine distributor selling directly into the open pharmacy market
• The managed care risk management business – Scriptpharm provides risk management and pharmaceutical value chain optimisation services to schemes through an integrated patient-focused approach. These services are delivered through a risk-based capitation model

Pharmacy Direct’s partnership with the NDoH to distribute medicine to public patients across South Africa performed exceptionally well during the financial year. This is demonstrated by our successful collaboration to increase script volumes from an average of 1.3 million to 1.4 million monthly deliveries (8% increase). Accordingly, the earnings contribution by the Pharmacy Direct public business to the retail cluster increased substantially compared to the prior period when considering the combined effects of the back-dated inflationary price increase agreed with the NDoH and various internal optimisation initiatives that are now well embedded into operations.

The Pharmacy Direct private business and Activo, our medicine distributor, were adversely affected by the withdrawal of their Designated Service Provider designation for three options under the Bonitas Medical Scheme. The loss of this designation, which took effect from November 2024, had a marginal downward impact on revenue and profitability in the pharmaceutical cluster during the financial period.

Activo experienced a mixed year with higher contributions from the pharmaceutical and over-the-counter channels, offset by lower sales in oncology, hospital and ARV lines. Single-exit pricing had a downward impact on ARV margins, which reduced by 9%, also contributing to the declining contribution of this particular channel from a sales mix perspective. The combined effects of volume losses and margin pressures necessitated a further review of the recoverability of the carrying amount of Activo. Following this review, the Board decided to impair goodwill attributable to the Activo/Forrester acquisitions by a combined value of R218 million.

The earnings contribution from risk-management services declined marginally due to higher claims experience and expenses incurred during the year.

Despite the various setbacks experienced across the cluster, operating profits improved by 11.5%, mainly attributable to our successful efforts to manage and contain costs by implementing headcount freezes and right-sizing initiatives.

Financial position

The Group has maintained a strong, resilient, and stable balance sheet. Notable highlights include the relatively low borrowings-to-asset ratio (0.18), stable debt-to-equity ratio levels (0.5) and improved net cash position compared to June 2024. The Group’s efforts to manage working capital continue to yield tangible results with better collections received during the year, primarily from the NDoH, which were used to manage down trade creditors.

Capital management

The Group takes a prudent and disciplined approach to capital management, ensuring that financial resources are allocated efficiently to support sustainable growth and long-term value creation. Capital is strategically deployed in line with the Group’s medium- to long-term plans, focusing on key investment areas that strengthen our service offering, drive operational efficiency or enhance membership experience. This approach enables the Group to remain competitive and maintain financial stability while navigating a dynamic external market and retaining strategic optionality to take advantage of opportunities.

The various businesses contribute towards a streamlined central treasury management function, which allows the Group to centrally manage liquidity, procure optimal funding terms, ensure regulatory compliance, achieve economies of scale and mitigate financial risk.

Dividends

The Group declared a dividend of 6 cents per share (December 2023: 11 cents per share). The declaration of a dividend is reflective of the Group’s resilience, cash flow generation capabilities and the Board’s confidence in the prospects of the business.

Conclusion

Despite the year that was, we remain excited and optimistic about the future. Slowing inflation, lower interest rates, and a more reliable electricity grid bode well for the general economy and are indicative of a more favourable operating environment in 2025, which we anticipate will further drive medical aid membership across our clients’ schemes.

We will continue to drive our refreshed strategy by deepening collaboration with our strategic partners and clients while investing in digital and clinical capabilities. This will enhance our ability to compete more efficiently and effectively, as AfroCentric leads the way in value-based care, keeping members at the heart of everything we do.

Thato Moloele
Group CFO