WEEKLY STOCK COMMENT: RAMSAY HEALTH CARE
Peter Ball, 12 July 2018
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.
RHC’s well regarded Chief Executive Officer Chris Rex recently retired from the top job. RHC has a track record of promoting from within and subsequently appointed Craig McNally, formerly Chief Operating Officer, to the top job. McNally has been heavily involved in RHC’s strategy in recent years so we don’t foresee any change in strategy for the company. The company will continue its brownfields development programme, the establishment of a retail pharmacy network in Australia, continue to improve efficiencies, and look for further acquisitions offshore.
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’s management team also has a history of extracting synergies from acquisitions and generating attractive 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.
Risks to RHC include; 1) increased competition, 2) regulatory change, and 3) development risk.