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

Ramsay Health Care Limited (ASX: RHC), is a well-known private hospital operator that runs about 235 hospitals along with day surgery facilities across regions spanning from Australia, France, the United Kingdom, Indonesia, Italy to Malaysia. The group’s FY18 result has been more or less in-line but the group demonstrated softness in FY19 guidance which is below expectations. Nonetheless, earnings upside from inorganic growth opportunities and savings with benefits from brownfields projects, are indicated to give a boost in FY20 and beyond.
 
Takeover Offer for European healthcare company, Capio AB: Ramsay Health Care Limited has segments that include UK, France and Asia Pacific; and in Australia, RHC is the largest private hospital operator and operates 73 hospitals and day surgery units there. Meanwhile, RHC’s 50.9% owned French subsidiary - Ramsay Générale de Santé (RGdS), launched an unsolicited takeover bid to acquire 100% of the shares in pan-European healthcare company - Capio AB (Nasdaq Stockholm listed). The offer was made at a price of SEK 48.5 per share and was indicated to value Capio’s equity at €661 million (A $1,041 million). RGdS planned to fund the takeover offer through a combination of debt and equity; and had executed an underwritten incremental debt facility with the leading financial institutions with a plan to undertake a rights issue for an amount of approximately €510 million. For this, RHC irrevocably committed for subscribing €257 million pro rata share of the RGdS equity raising and this was to be debt funded. Considering that Capio AB is a healthcare operator in five countries (Sweden, Denmark, Norway, Germany and France) with sales of about €1.6 billion and EBITDA of €116 million, a strong portfolio of healthcare facilities in Europe for RHC can be a good strategic fit and would further contribute to make RHC a leading global provider of healthcare services. RGdS has even estimated that pre-tax synergies of €20 million can be realized with majority of amount coming in through two to three years. Nonetheless, completion of the Offer is subject to conditions customary for public offers in Sweden, and may entail antitrust and regulatory approvals; while shareholders are believed to take a call such that RGdS becomes the owner of more than 90% of the shares in Capio. The acceptance period has already commenced on 6 September 2018 and will expire on 25 October 2018, although RGdS has reserved the right to extend the acceptance period. On the other hand, Large French private clinic group Vivalto Sante have also put the rival offer for just Capio's French hospitals business, but RHC considers this to  be a better offer.

Mixed Financial & Operational Performance in FY 18: For FY 18, RHC has reported 20.6% decline in the statutory net profit after tax and after net non-core items to $388.3 million from $488.9 million in previous year. The statutory net profit was affected by $122 million of asset write-downs or lease provisioning in the UK and $29.9 million of restructuring costs in France. Excluding the one-off costs, the underlying net profit grew 6.8% to $579.3 million. RHC has also raised its final dividend five cents to 86.5 cents, fully franked, payable on 28 September 2018. In FY 18, the company posted 6.2% increase in EBITDA to $1.4 billion and the Group revenue grew 5.4% to $9.2 billion. In FY18, RHC has completed the projects with a gross capital investment of $171 million that comprised of 208 gross beds consisting of 204 conversions or relocations providing a net increase of four beds. The company has also completed seven theatres along with 21 consulting suites. The company’s management had approved a record $325 million in new projects during the year 2018, which gave boost to the company’s confidence in the long term industry dynamics. These projects, including 229 net beds and 24 theatres, are expected to deliver strong returns in future years. RHC has a strong balance sheet, having financial flexibility to fund the pipeline of brownfield capacity expansion and future acquisitions. At the end of FY 18, the consolidated balance sheet leverage ratio was at 2.3x. During FY 18, in Australia the revenue grew 5.5% to $4.9 billion and the  Australia EBITDA rose 12.1% to $896.0 million. The company had maintained admission growth, above industry in this region, but was below normal admissions growth. This is due to fact that the industry was impacted due to the affordability and ongoing negative focus on private health insurance. On the other hand, the operational efficiencies had contributed to decent operating result. The company had witnessed lower than normal growth from brownfield program and is focusing on replacement facilities. EBIT grew in Australia due to the disciplined cost management strategies and the group is now focusing on achieving further operational efficiencies as well as some one-off benefits. In France, during 2018, RGdS had performed in line with expectations even when there was negative tariff environment. During the half year of 2018, RGdS had commenced large scale restructuring programme to centralise non-core hospital functions to a separate shared service centre. This programme, that will take three and a half years, is now on track. In France, revenue grew 0.3% to €2.24 billion and EBITDAR declined (0.6)% to €445.7 million. RHC has witnessed strong operating performance in Malaysia and the company is targeting universal healthcarepatients (BPJS) opening at two of the Indonesian facilities. Further, during 2018, in UK the company faced challenging operating environment due to NHS cost constraints and referral management schemes. Therefore, revenue fell (5.2)%to £424.2 million and EBITDAR declined (9.8)%to £102.7 million. There was significant downturn in NHS volumes in 2018.


FY 18 Financial Performance (Source: Company Reports)

Rise in Approved Brownfield Projects in FY 18: During FY 18, RHC has approved 39 consulting suites, 340 Gross beds, 111 Conversions, 229 Net beds and 24 operating theatres by gross capital investment of $325m. These are yet to be completed.


FY18 Approved Brownfield Projects (Source: Company Reports)

Outlook: RHC expects earnings growth to be subdued in FY19 due to challenging conditions in the UK, slow rates of growth in Australia and a neutral outlook in France. For FY 19, the company is projecting positive Core EPS growth of up to 2%, which will be adversely impacted by expected higher interest and tax in FY19. This means Core EBITDA growth in FY 19  for the Group is expected to be in the range of 4% to 6%. Moreover, the Australian brownfield programme is expected to deliver $242 million in completed projects in FY19. These projects comprise of net 216 beds and 15 operating theatres, and are projected to significantly contribute to the growth beyond FY19. For France, the tariffs for 2019 are expected to follow same trend as in 2018. In UK, short term continues to be uncertain but there is potential for market upside if the funding becomes available. The company has also announced recently significant extra funding for NHS. For Asia, RHC is appointing dedicated Asian acquisition to progress with growth opportunities in the market. Therefore, the company has increased the resources for it.
 

Dividend Growth (Source: Company Reports)

Stock Recommendation: Meanwhile, RHC stock has fallen 4.85% in three months as on September 14, 2018 as company’s statutory profit after tax fell significantly, majorly due to the downturn in NHS volumes of the UK business. However, the company has announced recently significant extra funding for NHS. Further, the stock fell due to interest rates’ scenario, the growth of private health insurance etc. Post the year to date fall of 21% in stock price, the technical indicators including the relative strength indicator and stochastic indicator, seem to enable the stock witness signs of revival. The stock has showcased resistance levels at $56.5 and $55.5 while it finds support at $54.49. The long term fundamentals of the sector remain resilient due to increase in ageing population. Additionally, if the takeover of Capio AB proceeds, then there will be sizeable rise to the European operations and this would be a strategic move for the company. Further, the company’s pipeline of acquisition opportunities continues to be strong due to balance sheet position. RHC plans to expand its global portfolio and is continuously looking for opportunities in new and existing markets that are of strategic fit. RHC has also increased their investment in a number of quality, digital, innovation and research initiatives to outperform in the industry. The group’s ROE, although down, is in line with industry median with quick ratio (1.05) and current ratio (1.19) also close to the industry medians of 1.04 and 1.18, respectively. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 55.330.
 
 
RHC Daily Chart (Source: Thomson Reuters)

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