Company Overview: Ramsay Health Care Limited is an operator of hospitals. The Company operates approximately 235 hospitals and day surgery facilities across Australia, the United Kingdom, France, Indonesia, Malaysia and Italy. The Company's segments are Asia Pacific, UK and France. The Company's facilities cater for a range of healthcare needs from day surgery procedures to complex surgery, as well as psychiatric care and rehabilitation. In Australia, the Company operates approximately 73 hospitals and day surgery units. In the United Kingdom, the Company provides independent hospital services in England, with a network of over 35 acute hospitals and day procedure centers providing a range of clinical specialties to private and self-insured patients, as well as to patients referred by the National Health Service (NHS). In the United Kingdom, it also operates a diagnostic imaging service and provides neurological services through its over three neuro-rehabilitation facilities.


RHC Details

With the rise in population and emerging needs among the ageing sector, expenditure in health care is rising given the expanding need of new technologies with patients becoming better informed now. Ramsay Health Care Limited (ASX: RHC) seems to be one stock that is expected to leverage from the changing dynamics wherein growth appears to be underpinned by demographics, quality portfolio of hospitals and ongoing business improvement with volume expansion. The focus that is expanding the private sector role in service provision for publicly funded patients is another factor that Ramsay can benefit from. Ramsay’s Pharmacy community franchise network is expanding and is concentrating on the sites closer to the hospital so that patients can be benefited by receiving medication and other integrated care services beyond the hospital boundaries. Though the expansion is slower than expected due to regulatory delays but still it has managed to generate some positive impact.

Healthy First Half Results for 2018: Australia’s largest private hospital operator, RHC announced a Group Core Net Profit After Tax of $288 million for the six months ending on 31 December 2017, representing an increase of 7.5% as compared to prior year. Core NPAT delivered core EPS of 139.0 cents for the half year against 128.9 cents of the previous corresponding period. As on 31 December 2017, the Group’s Consolidated Leverage Ratio was 2.4 times, which is well within Company’s internal parameters. Ramsay’s Australian business delivered EBIT growth of 9.1% due to market volume growth and due to the benefits of recent cost efficiency programmes. It experienced a solid growth in admissions and in procedural volumes in Australian business which is underpinned by a rapidly ageing and growing population. Directors declared a fully-franked interim dividend of 57.5 cents which is up by 8.5% as compared to previous corresponding period and this will be paid on 29 March 2018.
 

Growth Strategy (Source: Company Reports)
 
Growth Strategy continues: The Company’s brownfield development programme continued strongly and reflected an increase in demand for health care services. A further investment of $146m for expansion was approved by the Board and $57m worth of brownfields were completed lately in the first half of 2018 while the Company is set to open $147m worth of developments in the second half of FY18 and $156m in the first half of FY19. The pipeline for capacity expansion remains strong and currently $500m is under consideration including a major expansion of Joondalup Health Campus in Perth. Twenty-three retail pharmacies were added to the Group’s pharmacy franchise network in Australia during the first half of 2018 and the total number in network amounted to 54. An addition of Malouf Pharmacy’s business to the Group’s pharmacy network was a boom in this direction.
 

Leverage Ratio Trend (Source: Company Reports)
 
Performance across different Geographies: If we talk about the Group’s Australia business, revenue and EBIT were up by 4.3 per cent and 9.1 per cent as compared to corresponding period in the prior year and amounted to $2.5 million and $379.7 million, respectively. The Equity accounted share in Asia’s joint venture net profits was up by 24.1 per cent and amounted to $8.5 million. While revenue and EBITDAR from UK’s business were down by 4.8 per cent and 4.6 per cent, respectively, on pcp basis; France was slightly better with revenue plunging by 1.1 per cent though EBITDAR plunged by 5.8 per cent against the prior corresponding period. It is expected that UK will experience a positive tariff adjustment with effect from 1 April 2018. There are burgeoning number of people waiting for the treatment in the UK and the group expects that a normal volume of growth will return in the short to medium term.
 

 Financial Performance in UK and in France (Source: Company Reports)   
 
Continued investment in growth initiatives: The Group is planning to invest in a major transformation project for its French operations which will centralise the non-core hospital resources and will distinguish this business in the long term. A significant centralisation programme undertaken by Ramsay Generale de Sante (RGdS) would look after its non-core hospital functions such as finance, administration and HR, located in a separate shared service centre in the outer suburbs of Paris. Once fully implemented, it will result in annual recurring gains of 5 million Euros for RGdS. This programme will commence in the second half and will take almost three years. RGdS provided 43.7 million of Euros for restructuring changes (net impact to Ramsay Group Statutory NPAT of $23.9 million) which will be mainly for future redundancies and has been expensed off as a non-core item in the half year.

Private Health Insurance Reforms: Government recently announced for a private health insurance (PHI) reform package which reflected the government’s support for the private health system. Company expects to see some recovery in PHI participation rates and opportunities from expanded mental health cover now. Further, the reforms seem to have provided premium discounts on hospital cover of up to 2 per cent each year but person should be of a maximum age of 30 and discount of 10 per cent for 18-25 age group. Patients with limited mental health cover will now be able to upgrade their cover to access in-hospital mental health services without serving a waiting period. The Group opened Southport Private Hospital on Gold Coast in April 17 which was primarily built to address the shortfall of rehabilitation and mental health services in the region. It is exploring acquisitions in the existing markets and in new markets which will add a long-term value to the shareholders.

Positive Outlook for 2018: Attractive Demographic sector fundamentals combined with Company’s geographic, case-mix and reimbursement diversification and as well as consistent execution of Company’s strategy, would underpin future growth for the organisation. Ramsay’s scale and diversity would ensure that it continues to deliver earnings growth in a changing health economy. Demand for health care is rising in both traditional and in non-traditional care settings, so therefore the Group is looking at further out-of-hospital opportunities, including its pharmacy strategy so that it can deliver innovative, cost-effective and patient-centred care to the community. RHC expects that its FY18 Core EPS growth will be between 8-10%.
 

Dividend Growth (Source: Company Reports)
 
Stock Performance: Company’s strong balance sheet with financial flexibility continues to fund the pipeline for brownfield capacity expansion and future acquisitions and reinforces strength for future growth. It also performed well from dividend growth aspect and it is expected that it will maintain its dividend pay-out ratio of approximately 50 per cent of Core EPS for the full year and will reinvest the balance 50 per cent in the business. The stock declined by 8.4 per cent in the past three months but managed to rise by 1.75 per cent in the last week (as at March 10, 2018). Meanwhile, the directors of the group were seen to dispose off shares of the group, and this has derailed some of the investors. However, the stock has a long-term potential given the quality of the business and ageing population trends. While UK and France performance needs to gear up, factors such as volume improvement from the National Health Service (NHS) in the UK, might give some room for an upside with other efforts put in place. Looking at the overall performance, we recommend to “Buy” the stock at the current market price of $63.83
 
 
RHC Daily Chart (Source: Thomson Reuters)

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