Analyst Research

Ramsay Health Care (RHC) – NEUTRAL

August 31, 2018
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August 31, 2018

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Ramsay Health Care (RHC) – NEUTRAL

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
31/08/18RHCA$54.48 A$59.33 NEUTRAL
Date of Report

31/08/18

ASX

RHC

Price

A$54.48

Price Target

A$59.33

Analyst Recommendation

NEUTRAL

Sector : Healthcare52-Week Range: A$53.01 – 71.15
Industry: HospitalsMarket Cap: A$11,009.4m

Source: Bloomberg

INVESTMENT SUMMARY

We rate RHC as a Neutral for the following reasons:

  • Largest private hospital operator in Australia, with attractive industry fundamentals (aging population). Favorable macro industry trends: ageing and growing population, proliferation of chronic disease, and increasing innovation, treatment, and technologies to drive demand to private hospitals.
  • Supportive government policy (tax incentive for people to get private health insurance).
  • Ongoing brownfield program driving earnings and offshore earnings growth.
  • Significant operations offshore provide opportunity for growth outside of domestic market.
  • Attractive industry dynamics and high barriers to entry

We see the following key risks to our investment thesis:

  • Short term weakness as per management’s FY19 guidance.
  • Competitive risk (new hospitals, new beds), from listed and unlisted hospital operators.
  • Brownfield projects fail to deliver the earnings uplift.
  • Cost pressures (negotiating price increases with private health insurance companies).
  • Change to government policy on private health insurance.
  • Execution risk (able to get the uplift in earnings from brownfield projects).
  • Earnings growth in offshore operations disappoint.
  • Currency risk.

Figure 1: RHC Revenue by Segment

Source: Company

Figure 2: RHC EBITDA by Segment

Source: Company

ANALYST’S NOTE

RHC reported FY18 results in line with its pre-announced disappointing June 2018 trading update where the Company revised guidance.

Indeed, management noted “as disclosed to the market in June, our FY18 results were impacted by the significant downturn in NHS volumes in our UK business as well as softer growth rates in our Australian business and the decision to temporarily slow down the rollout of the Ramsay Pharmacy franchise network while we invest in infrastructure and resources to successfully scale this franchise business for the long term”.

Key highlights include:
1. Core Net Profit After Tax of $579.3m, up +6.8% increase on the previous corresponding period, which equates to core EPS of 279.8cps, up +7.0% on the 261.4 cents recorded in pcp and in line with the revised guidance provided in June 2018.
2. fully-franked final dividend of 86.5 cents, up +6.1% on the pcp, taking the full year dividend to 144.0 cents fully-franked, up +7.1% on the prior year.
3. Reported NPAT and after net non-core items of $388.3m, was down 20.6% on the prior year which reflect net non-core items of $191.0m (net of minorities and net of tax) recognised (mainly due to Ramsay UK recognising an onerous lease provision and asset write downs related to certain UK sites of $122.0m (net of tax) and Ramsay Générale de Santé (RGdS) recognising restructuring costs of $29.9m).
4. RHC has enough balance sheet flexibility to fund “continuing demand for brownfield capacity expansion, future acquisitions and ongoing working capital needs” with consolidated leverage ratio of 2.3x, well within internal parameters.

Longer term, we don’t doubt the quality of RHC (at the management level and assets) however, we yield to management’s warnings of short term weakness. We maintain our Neutral recommendation.

  • Asia-pacific (~65% of earnings). In terms of Australia, revenue was up +5.5% to $4.9bn and EBITDA up +12.1% to $896.0m. In our view, these were solid outcomes considering RHC’s hospitals were able to maintain admissions growth above the industry despite concerns over affordability of private health insurance. Projects with a gross capital investment of $171m were completed (which includes seven theatres and 21 consulting suites). RHC’s board also approved a record $325m in new projects (including 229 net beds and 24 theatres). RHC’s equity accounted share of Asian joint venture net profits was $16.8m, up 27.7%.
  • France (~29% of earnings). Revenue was up +0.3% to €2.2bn and EBITDAR down -0.6% to €445.7m. These disappointing results were as expected by the market given the persisting negative tariff environment. The programme to centralise non-core hospital functions to a shared service centre announced at the half year results remains on track and will take three to four years.
  • UK (~6% of earnings). Revenue was down -5.2% to £424.2m and EBITDAR down -9.8% to £102.7m as demand management strategies had a negative impact on NHS volumes despite positive tariff adjustments.
  • Weak short-term outlook and guidance but longer-term fundamentals intact. Management guided that “based on current operating conditions in each of our core markets and barring unforeseen circumstances, in FY19, Ramsay is targeting positive Core EPS growth of up to 2%, adversely impacted by anticipated higher interest and tax in FY19. This corresponds to Core EBITDA growth for the Group of 4% to 6%”. Further we note, management is expecting “underlying earnings growth to be subdued driven by a combination of challenging circumstances in the UK, a slower rate of growth in Australia, and a neutral outlook in France”. Australian brownfield programme will deliver $242m in completed projects in FY19 and includes net 216 beds and 15 operating theatres, and “are anticipated to contribute materially to growth beyond FY19”.
  • Bid for Capio AB (Capio). In July 2018, RHC’s 50.9% owned French subsidiary, RGdS, launched an unsolicited takeover bid for Nasdaq Stockholm listed, pan-European healthcare company, Capio. Offer completion is subject to conditions customary for public offers in Sweden, including, among others, antitrust and regulatory approvals and that the Offer is accepted by shareholders to such an extent that RGdS becomes owner of more than 90% of shares in Capio.

RHC FY18 Results Summary…

Figure 3: RHC FY18 results summary

Source: Company

Figure 4: RHC Financial Summary

Source: BTIG estimates, Company, Bloomberg

COMPANY DESCRIPTION

Ramsay Health Care Ltd (RHC) provides healthcare services. RHC operates 238 hospitals, day surgery centres, treatment facilities, rehabilitation & psychiatric units across six countries. The company has operations in Australia (71), United Kingdom (36), Italy (1), France (123), Malaysia (3) and Indonesia (3).


Recommendation Rating Guide

Recommendation Rating GuideTotal Return Expectations on a 12-mth view
Speculative BuyGreater than +30%
BuyGreater than +10%
NeutralGreater than 0%
SellLess than -10%

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