Company Reports

We cut our fair value estimate for narrow-moat Ramsay Health Care by 9% to AUD 62. Fiscal 2024 revenue from patient activity grew 7% in constant currency to AUD 16.7 billion, in line with our expectations, driven by 3% volume growth, tariff uplifts, and new capacity. However, underlying EBIT of AUD 1.034 billion was up a smaller 6%, and 9% below our forecast. The result was dragged down by underlying EBIT in France falling 21%. The decline largely reflects lower government support that is significantly lagging cost inflation. While future earnings in France are supported by a 3.2% tariff increase from July 2024, indexation will be 0.6% in the UK, and, overall, wage growth is likely to outpace tariff indexation in Europe.

Ramsay’s Australian business enabled its global acquisitions, but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.

We maintain our AUD 68 fair value estimate for narrow-moat Ramsay Healthcare. Fiscal 2024 underlying net profit after tax grew roughly 18% to approximately AUD 297 million, broadly in line with our prior expectations. This was driven by improved pricing, recovering volumes, and labour efficiencies. We keep our long-term estimates broadly unchanged, but decrease our forecast fiscal 2024 reported NPAT by 14% to AUD 267 million, largely due to nonrecurring items. This sits within management’s guidance range of AUD 265 million-AUD 270 million.

Ramsay’s Australian business enabled its global acquisitions, but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.

We maintain our AUD 68 fair value estimate for narrow-moat Ramsay Healthcare following Managing Director and CEO Craig McNally’s decision to retire after a long tenure with the company since 1988. McNally was appointed MD and CEO in 2017 and is expected to retire at the fiscal 2025 year-end.

We maintain our AUD 68 fair value estimate and earnings estimates for narrow-moat Ramsay Health Care. The shares have declined roughly 15% since reporting in February and currently trade at a 31% discount to our fair value estimate. We think the market has a myopic view of Ramsay’s profitability, driven by inflationary concerns. We expect margin recovery as Ramsay has negotiated higher rates for both private and public work, activity trends in higher-margin work are recovering, and staff availability is increasing. We also expect a significant fiscal 2024 second-half seasonal skew in Europe supported by a French tariff increase from March 1.

Narrow-moat Ramsay’s first-half fiscal 2024 revenue increased by an impressive 8% in constant-currency terms to AUD 8.1 billion, driven by 5% volume growth, tariff uplifts, and indexation. Despite this, the underlying EBIT was slightly softer than we expected, up 5% to AUD 505 million and dragged down by the underlying European EBIT, which fell 22%. The decline primarily reflects tariff increases that did not adequately compensate for cost inflation. However, we expect a significant second-half seasonal skew in Europe supported by a French tariff increase commencing March 1, 2024. As such, we decrease our fiscal 2024 group EBIT forecast by only 2% to AUD 1.1 billion and leave our long-term estimates broadly unchanged.

Ramsay’s Australian business enabled its global acquisitions, but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.

Shares in narrow-moat Ramsay Health Care remain undervalued as the market underestimates its ability to both expand margins and grow revenue. Ramsay’s stock is down 23% year to date and trades at a steep discount to our unchanged AUD 68 fair value estimate.

Ramsay’s successful and cash generative Australian business enabled its global acquisition strategy but the market fundamentals in the chosen geographies are far less attractive than at home. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to recent APRA data, 45% of the Australian population have PHI and over 80% of private hospital revenue flows from private insurance versus 20% of revenue in the U.K. and France and 10% in the Nordics. This has a direct impact on profits earned as providers are price-takers in public outsourced work.

Given the government financial underpins for private hospitals in all major Ramsay geographies we were surprised by the AUD 1.4 billion equity raise, an additional 10% of shares on issue, announced today. The stated intention for the share issuance is to provide financial flexibility and we interpret this as the company seeking making opportunistic acquisitions. We believe the returns on acquisitions outside of Australia have historically diluted overall group returns on invested capital and are thus skeptical of the strategy, although in the near-term the proceeds will be used to pay down debt. We continue to forecast the company will post no operating profit for the final quarter of the financial year, but now expect the impacts in the U.K. and France to continue through into the first half of fiscal 2021. A function of the government agreements is that narrow-moat Ramsay effectively earns no profits when acting in this capacity. Consequently, we trim our fair value estimate to AUD 57 from AUD 60.

We update our outlook for narrow-moat Ramsay factoring in an estimated three-month cancellation of nonurgent elective surgeries in Australia and the recently announced federal government’s viability for capacity guarantee. The Australian government has enlisted private hospital operators to make all facilities and medical staff available to treat COVID-19 patients and other public hospital overflow in exchange for a guarantee that ensures the hospital provider remains viable once the pandemic is over. We trim our fair value estimate to AUD 60 from AUD 63 on the basis that around 60% of Ramsay Australia’s case mix is highly profitable elective surgeries and we assume that government support merely returns the business to break-even while operating under its direction. Importantly, we don’t expect Ramsay to declare a dividend at the end of fiscal 2020, and anticipate dividend payments to resume in fiscal 2021.

The decline in underlying margin in the first half in Ramsay’s Australian operations came as a surprise. This segment contributes approximately 80% of our fair value estimate and based on moderating our outlook for longer-term margins in Australia we reduce our fair value estimate to AUD 63 from AUD 67. The lower margin is a function of increased prosthesis costs, which is a pass-through no margin item for the hospital, and delays in concluding a fee increase with Medibank. We expect the technology-driven prosthesis element to persist. However, our narrow moat for Ramsay is based on negotiating power that it has with private health insurers, and we anticipate Ramsay to be successful in securing fee increases, leading to moderate margin improvement going forward.

Ramsay’s successful and cash generative Australian business enabled its global acquisition strategy but the market fundamentals in the chosen geographies are far less attractive than at home. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to recent APRA data, 45% of the Australian population have PHI and over 80% of private hospital revenue flows from private insurance versus 20% of revenue in the U.K. and France and 10% in the Nordics. This has a direct impact on profits earned as providers are price-takers in public outsourced work.

At its AGM, narrow-moat Ramsay reiterated its core EPS guidance of 2% to 4% growth in fiscal 2020. Our fiscal 2020 EPS growth forecast of 5.9% is ahead of this range and is based on the most recent foreign exchange rates and industry data in both Australia and the U.K. Despite minor near-term revenue and cost adjustments, we make no change to our AUD 67 fair value estimate.

Ramsay’s successful and cash generative Australian business enabled its global acquisition strategy but the market fundamentals in the chosen geographies are far less attractive than at home. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to recent APRA data, 45% of the Australian population have PHI and over 80% of private hospital revenue flows from private insurance versus 20% of revenue in the U.K. and France and 10% in the Nordics. This has a direct impact on profits earned as providers are price-takers in public outsourced work.

Narrow-moat Ramsay Health Care reported fiscal 2019 revenue in line with our expectations, but margins outside of Australia dragged earnings down more than we anticipated. We expected a core EBITDA margin decline of 1% from the 15.2% achieved in fiscal 2018 as a result of the acquisition of low-margin Capio in November 2018. However, margins in both Ramsay General de Sante, or RGdS, and the U.K. disappointed despite a more benign pricing environment and the group reporting a core EBITDA margin of 13.8%. We forecast further group level margin declines in fiscal 2020 given inclusion of a full year of Capio, but stable margins in the U.K. and Europe as a result of positive tariff increases. Thereafter we expect margin improvement once uncertainty of Brexit has passed and RGdS has fully integrated Capio. However, this improvement now looks lower than previously anticipated, and we reduce our fair value estimate to AUD 67 from AUD 70 based on lower margin outlook of 13.9% in fiscal 2024 from 14.6% prior and a higher tax rate, a result of the profit mix from higher rate countries.

Ramsay’s successful and cash generative Australian business enabled its global acquisition strategy but the market fundamentals in the chosen geographies are far less attractive than at home. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to recent APRA data, 45% of the Australian population have PHI and over 80% of private hospital revenue flows from private insurance versus 20% of revenue in the U.K. and France and 10% in the Nordics. This has a direct impact on profits earned as providers are price-takers in public outsourced work.

We raise narrow-moat Ramsay Health Care's fair value estimate to AUD 70 from AUD 65 on the back of an improved view of long run margins and lower capital spending required to achieve organic growth rates. Ramsay’s value is derived largely from its Australian business, where an estimated 80% of revenue is earned via private health insurance, or PHI. This enables the firm to achieve high-teen operating margins, in line with global private hospital peers. This business is also the only source of moat, based on payor negotiating power-which allows the firm to achieve above-peer increases from PHI providers-and cost advantage. Conversely, in Ramsay’s other geographies the bulk of revenues are low-margin public tender contracts. Despite a lack of sustainable competitive advantages in these regions, the firm’s acquisition trail continues, which dilutes the contribution of the premium Australia business. We question the benefits of being global in this industry. While scale within a geographical market brings cost and, in Australia, payor negotiation benefits, we think geographic spread adds regulatory and process complexity.

Ramsay’s successful and cash generative Australian business enabled its global acquisition strategy but the market fundamentals in the chosen geographies are far less attractive than at home. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to recent APRA data, 45% of the Australian population have PHI and over 80% of private hospital revenue flows from private insurance versus 20% of revenue in the U.K. and France and 10% in the Nordics. This has a direct impact on profits earned as providers are price-takers in public outsourced work.