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Stock Of The Day - Ramsay Healthcare (Expensive)

In today’s daily we cover Ramsay Health Care Limited (RHC).  The company recently made a presentation on UBS healthcare forum, whose main highlights were a growth plan to achieve a core NPAT and core EPS growth of 18% to 20% for full year FY2015. 


Demand for Healthcare (Source - Company Reports)

The main basis for this growth, are cited to be strong industry fundamentals. Demand for healthcare care will remain strong for an ageing population, with longer life expectancy, increase in chronic disease burden, population growth and improvement in treatment and diagnostic measures. The global population aged 60 or above is expected to more than triple by 2050. The current growth rate is of older population at 1.9% and is significantly higher than that of total population at 1.2%. The population is Australia will grow from 23.9 million to 39.7 million at an average growth rate of 1.3% per annum by 2054. The UK Population is predicted to increase by 9.6 million (15%) to 73.3 million over the 25 years period to mid 2037. New Technologies and innovations will continue to drive the demand of healthcare in these countries. The increased prevalence of chronic health diseases will also increase the demand of treatment. 


Dividend Growth (Source - Company Reports)

The company has a strong trend of growth in the past few years. Revenue growth has been achieved by a combination of organic growth, brownfield capacity expansion and acquisitions. The organic growth of the company has been achieved by the demographics, quality portfolio of hospitals and ongoing business improvement. The company has been continuously targeting to meet unmet demands by driving Ramsay’s ongoing investment in capacity expansion.


Revenue Growth Milestones (Source - Company Reports)

There is a potential for more partnerships to manage or develop to provide more hospital services in the changing political landscape. The company is further exploring acquisitions in existing and other markets. The company has proven that it can export it’s management model which it claims is the main reason for increase in shareholder value. The operating revenue of the company has grown at a compounded annual growth rate of 21.7% for the 17 years from FY1997 to FY 2014. Apart from growth in operating revenues the company has also registered growth in the core EPS and dividends with dividend growth at a compounded annual growth rate of 16.5% for the 17 years from FY1997 to FY 2014 and EPS growth at a compounded annual growth rate of 16.6% for the 17 years from FY1997 to FY 2014. Dividends have grown in line with EPS due to the company’s policy of maintenance of a full year dividend payout ration of 50%. The company has approved over $1.5 billion worth of Brownfield capacity over the last 9 years. Brownfield capacity expansion opportunities identified at least of $1 billion in the next five years.  


Growth Opportunities (Source - Company Reports)

For the six months period ending 31 December 2014, company increased its NPAT by 19.1% to $204 million and the core EPS was up 20.2% to 97.6 cents. The group revenue increased by 41.6% to $3.3 billion, while EBIT was up by 32.2% to $377.8 billion. The group leverage ratio has decrease from 5.1 to 2.6 over the years signifying an increasingly healthy balance sheet.


RHC Daily Chart (Source - Thomson Reuters)

The EBITDA of Australian hospitals increased from 18.8% to 19.3% for the six months period ending 31 December 2014. Private health insurance in Australia remains strong at 47.2% participation. The company completed $175 million of Brownfields in the first year and further brownfield opportunities have been identified for the next six months. The growth numbers are backed by strong growth in admissions indicating that the majority of the growth is still organic. The EBITDA of the UK business increased as well rising 8.3% for the six months period ending 31 December 2014. There can be further improvement since UK PMI is showing signs of recovery. There was a strong double-digit growth in NHS admissions of 12% in the first half. The EBITDA of the French operations grew by 582% for the six months period ending 31 December 2014, as a combination of organic growth and acquisitions. The company is also laying down the groundwork for growth in Asia. 
 

The company is currently trading at a stock price of $60.960, which is somewhere close to the 52 week high of 69.220 and further from the 52 week low of 43.760. At the current price the company is trading at a Price to Earnings multiple of 36.8 and a dividend yield of 1.574%. Most of the companies in the sector are trading at a lesser P/E ratio. The stock can be thus considered expensive as compared to its peers. 

While the company has a long positive trend of growth over a period of time, much of that growth is already factored in the high P/E ratio of the stock. Most of the growth plans of the company are based on the improvement of sector fundamentals, which will also benefit other players in the sector which are selling at a lesser P/E multiple. Given the relative overvaluation in the sector, we believe that the stock is expensive at the current price of $61.40.