WEEKLY STOCK COMMENT: RAMSAY HEALTH CARE
Roy Davidson, 13 April 2017
Ramsay Health Care (RHC) is the largest private hospital owner/operator in Australia and one of the top five globally. The company has over 200 hospitals and surgeries located in Australia, France, the UK, Indonesia, and Malaysia, with an estimated 30% of the Australian private hospital market.
RHC’s steady and defensive cash flows are supported by Australia’s ageing population and by increased hospital occupancy. The ageing population is translating into a rapid surge in demand for hospital space. To meet this demand, RHC continues to invest in brownfields developments. The company has a successful track record in this regard, consistently delivering a return on investment of greater than 15% on its projects. RHC has also stated it is looking to invest more substantially in the Chinese market, a market that holds significant potential.
RHC’s overseas operations have begun to make a significant contribution to earnings growth and positions the group well for the long-term. In particular, RHC’s French acquisition of Proclif (renamed Ramsay Sante) positions RHC well to take part in consolidation of the very fragmented French private hospital market. RHC also entered the Asian market in 2013 through an investment in a joint venture with hospitals in Indonesia and Malaysia. In 2014, Ramsay Sante agreed to acquire 83.4% of Generale de Sante, the number one private operator of for-profit clinics in France with 9,100 beds in 75 facilities, making it the largest operator in the country.
Like a broken record, RHC delivered a strong 1H17 result despite tough conditions in the Australian market. This, combined with steady offshore contributions, saw the company upgrade FY17 guidance, now expecting EPS growth of 12-14%. However, the news of CEO Chris Rex’s retirement later this year overshadowed the result, with no successor named at the time. RHC has a track record of promoting from within and subsequently appointed Craig McNally, COO, to the top job. We don’t foresee any change in strategy for RHC.
We expect RHC to continue to deliver strong earnings growth due to its leverage to Australia’s ageing population and as it looks to consolidate the fragmented French market and grow into the promising Asian market. RHC also has a strong management team with a history of extracting synergies from acquisitions and generating strong returns on brownfield developments. The company has a strong balance sheet, good cash flow generation, and we expect that it will be able to use its now much larger buying power to reduce consumables costs in its hospitals. Australian healthcare reviews are ongoing, however, we see the likely impact on RHC as relatively small and dwarfed by the long-term opportunity the company faces.
Risks to RHC include; 1) increased competition, 2) regulatory change, and 3) development risk.