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 moves favorably on the Acquisition of Capio: Ramsay Health Care Limited (ASX: RHC), one of the largest operator of hospitals with about 235 hospitals and day surgery facilities across Australia, the United Kingdom, France, Indonesia, Malaysia, and Italy, has lately reported about the progress with regards to the acquisition of Nasdaq Stockholm-listed Capio AB. Particularly, RHC’s 51% listed French subsidiary Ramsay Générale de Santé’s (RGdS) Offer for the acquisition of Capio AB has received successful acceptance from Capio shareholders having approximately 98.51% of the shares in Capio.This was reported at the close of the extended offer period on 7 November 2018. The company has been able to get clearance from the French Competition Authority, and has been able to satisfy all necessary conditions for the Offer. Capio has now become a majority-owned subsidiary of Ramsay Générale de Santé post the settlement that took place on November 07, 2018. Therefore, in November 2018, the pan European healthcare operator, Capio AB, has finally joined the RHC network. Capio, a leading and quality provider of healthcare services in Europe with a well-balanced geographic footprint, has operations in Norway, Sweden, Germany, France and Denmark, that has added around 189 facilities with over 5 million patients per annum to the group. The acquisition of Capio will help RHC grow its global portfolio in new markets.


Network Expansion (Source: Company Reports)

Moreover, Capio operates in stable markets with strong industry fundamentals, and has a holding of market leadership positions, leads in healthcare, digitalization and specialization and has high performing French operations and strong presence in Toulouse & Lyon, which enhances RGdS’ cluster strategy. Capio is expected to be core EPS accretive for the company in next 2-3 years. Overall with the acquisition of Capio, Ramsay Health Care’s global network has expanded across 11 countries, with 8.5 million admissions or patient visits to its facilities in about 480 locations. Additionally, RGdS has planned to fund this acquisition, including the offer price, refinancing of Capio’s existing debt and transaction costs through a mix of equity (€550 million) and debt for the balance. Ramsay’s pro rata share of RGdS’ proposed equity raising has been approximately €314 million (AUD506 million) and will be funded by Ramsay using its Euro denominated debt facilities. In addition, RGdS has planned to initiate a compulsory buy-out procedure and will go for the delisting of Capio’s shares from Nasdaq platform.

Operating Environments in Australia, France & Italy, United Kingdom and Asia: RHC’s Australian hospitals are performing well despite there are industry headwinds, which reflect the company’s strength and diversity of portfolio. The industry is currently being impacted by affordability and ongoing negative focus on private health insurance. The company in FY18 had maintained the admissions growth above industry but below long-term trend. Currently, the admissions growth is below the long-term average. There has been lower growth from Australian brownfields in FY18 but the company’s investment focus was on upgrading the existing facilities and approved record level of brownfields in FY18. RHC is maintaining its focus on innovation and cost optimization strategies. In Australia, the long-term industry fundamentals are expected to continue to accelerate demand for healthcare. Moreover, in France, there is an improvement in operating environment for private hospitals. There has been growth in overall admissions particularly in mental health, ambulatory care and emergency presentations. In France, the company has achieved a leadership position in digitalization of the patient journey, quality, and safety. The large-scale restructuring programme to centralize non-core hospital functions is on track as per the plan. In UK, there is a challenging operating environment due to NHS cost constraints and referral management schemes. Currently, there has been a significant downturn in NHS volumes. However, Ramsay UK remains as the market leader in electronic GP referrals. The company focusses on clinical leadership & cost efficiencies. The company has recently announced significant extra funding for NHS. The growing market is very competitive in Asia; and despite this, the company is showing strong operating performance and is controlling cost in a key focus area. There is a ramp-up of brownfield developments and there is long-term growth opportunity for RHC in Asia.

Shift in Global Industry Fundamentals: In all regions around the world, health spending is rising as the populations are growing and aging, the technologies are improving, and nowadays the patients have become better informed. Further, the demand for health care is going to increase at a faster rate than the capacity of the sector itself. The number of people aged over 65 has risen to more than 656 million, or 11.5% of the total population. Globally, there has been rapid growth in chronic disease prevalence, most specifically, cancer, heart disease, and diabetes. For example, 415M diabetics in 2018 are expected to rise to 642M by 2040. The rise in depression is the leading cause of ill health and disability worldwide. Currently, more than 300 million people are living with depression, which is an increase of more than 18% between 2005 and 2015.

Resilient 2018 Performance: For FY 18, Ramsay Health Care Limited has delivered 6.8% growth in the Core Net Profit After Tax to $579.3 million. There has been a 7% rise in core EPS to 279.8 cents, which is in line with revised guidance provided in June 18. In FY 18, RHC has reported a 5.4% increase in the Group Revenue to $9.2 billion, and a 6.2% increase in Group EBITDA to $1.4 billion. The company has declared a fully-franked final dividend of 86.5 cents, which is up 6.1%. The total full-year dividend is of 144 cents fully-franked, up 7.1%.


FY 18 Financial Performance (Source: Company Reports)

Outlook: RHC expects challenging conditions to continue in FY 19, the company has lowered the forecast than normal earnings growth, however there are some positive signs for future growth particularly in the UK. The company has already started a restructuring programme to further improve efficiencies across the business in all the markets, which is expected to create more value in the long-term for the shareholders. The company will also continue with the strategy of organic growth, brownfield developments and growth through acquisition as well as looking at new strategies leveraging on the core competencies. The company has committed to spending more on brownfields to meet the demand from growing and ageing populations. The Board has already approved a record $325 million in capacity expansions and redevelopments at the hospitals in Australia which will not only expand the existing facilities of the company to meet growing demand but will also enhance the environment of care delivery for the patients. Additionally, for FY 19, the Australian brownfield programme is expected to deliver $242 million in completed projects. These projects will comprise of net 216 beds and 15 operating theatres, and are expected to contribute materially to growth beyond FY 19. There will be neutral impact from the acquisition of Capio in FY19. Barring unforeseen circumstances, RHC targets for positive Core EPS growth of up to 2% in FY 19.


Brownfields Update (Source: Company Reports)

Stock Recommendation: RHC stock has fallen 3.62% in three months as on November 23, 2018 and is at a low price to earnings ratio when compared to many peers. The stock price weakened due to the rising unaffordability of private health insurance, the slowed private admission growth, and a lower than expected outlook. However, the long-term growth appears to stay intact. Further, with the acquisition of Capio, Ramsay Health Care’s global network is said to expand across 11 countries, with 8.5 million admissions or patient visits to its facilities in 480 locations. The transaction will enable RGdS/Capio to become the second-largest European acute healthcare provider and a higher contribution from this zone to consolidated revenue will help RHC. The company is also exploring other potential M&A opportunities in Sweden and this along with a number of public contracts due for renewal in near to medium term will boost the performance. A single digit rise (%) in stock price is expected based on better earnings in next 24 months in view of contributions from brownfield developments, operational efficiencies that will support growth into FY20 and additional earnings growth from Capio. This comes from the fact that RHC has been able to demonstrate consistent earnings and dividend distribution despite the industry led challenges and is expected to continue to perform the same way in the long term. The company’s stock is trading at a price of $54.82, and has support around $52 and resistance around $57. Therefore, we give a “Buy” recommendation on the stock at the current price of $ 54.82.
 

RHC Daily Chart (Source: Thomson Reuters)

 
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