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) operates about 235 hospitals and provides day surgery facilities across various countries (including Australia, the United Kingdom, France, Indonesia, Malaysia and Italy). The Company operates through the segments - Asia Pacific, UK and France; and offers a range of healthcare services, that include the day surgery procedures to complex surgery, along with psychiatric care and rehabilitation. In Australia, the company has operations of about 73 hospitals and day surgery units. In FY18, Ramsay Health Care had admitted 3.5 million patients, and had 25,500 hospital beds across the three continents. In FY 2018, the growth in revenue and gross profit has been up by mid-single digit and dividend has also been at decent levels. This quality health care company is aiming to be back in terms of performance given the latest acquisition and other key developments across the globe. It might look to be trading at slightly higher levels given the price to earnings ratio, however, the track record of deriving value and other growth catalysts expected to prove beneficial beyond FY19 indicate for a decent future.

Gaining strength in the network post a bolt-on acquisition: RHC has acquired Nasdaq Stockholm-listed Capio AB, as the company’s 51% owned listed French subsidiary Ramsay Générale de Santé (RGdS) Offer for the acquisition was received well by Capio shareholders having about 98.51% of the shares in Capio. The company had also received unconditional clearance from the French Competition Authority and all other conditions meant for the completion of the Offer were satisfied. As a result, in November 2018, the pan European healthcare operator, Capio AB, finally became the part of the RHC network. Capio, a leading quality provider of healthcare services in Europe with a well-balanced geographic footprint, also offers wide range of services like RHC. Capio  has operations in 5 countries, that include Norway (No. 2 in position), Sweden, Germany, France (No. 3 in position in the acute care sector) and Denmark, which has added around 189 facilities. During 2017, Nordic formed 57% of Group net sales, France formed 35% of Group net sales and Germany formed 8% of Group net sales.

Capio for 2017 had reported net sales of SEK15,327 million (AUD2,375 million (equiv)) and has strong presence in Toulouse & Lyon, which will enhance RGdS’ cluster strategy. More than 5 million patients per annum have been added with RHC after Capio’s acquisition. This acquisition will provide a way for further bolt-on acquisitions in the Nordics. The acquisition of Capio’s integrated healthcare network is as per Ramsay Health Care’s strategy to grow both its hospital and out-of-hospital businesses. As well as, it is consistent with the company’s strategy to grow the global portfolio in new markets, where it is a strategic fit. Moreover, Capio operates in stable markets with strong industry fundamentals, 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 also offers a gateway for further bolt-on acquisitions in the Nordics and is expected to be core EPS accretive for Ramsay within two to three years. Overall with the acquisition of Capio, Ramsay Health Care’s global network has been expanded across 11 countries, with 8.5 million admissions or patient visits to its facilities in 480 locations. The combined entity now employs 77,000 staff. Additionally, RGdS had 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’s proposed equity raising is approximately €314 million (AUD506 million) and will be funded by Ramsay using its Euro denominated debt facilities. In addition, RGdS had started a compulsory buy-out procedure with respect to the remaining shares as per the Swedish Companies Act. In relation with such compulsory buy-out procedure, RGdS promoted the delisting of Capio’s shares from Nasdaq Stockholm. Once this gets delisted, RGdS will be the owner of the remaining shares of Capio during the first half of 2019. With the acquisition of Capio, the significant synergies at RGdS level will result in c.€20m, which is expected to be realised within 2-3 years; and the acquisition of Capio is Core EPS accretive within 2 to 3 years.


Transaction rationale (Source: Company Reports)


Growth from Brownfield Expansions: RHC board in FY 18 has sanctioned a record $325 million for the capacity expansions and redevelopments at the company’s hospitals in Australia. This amount will not only expand the hospitals’ facilities for meeting the growing demand but will also increase the overall environment of care delivery for the group’s patients. As an example, the new built psychiatric clinic in Sydney’s north, which is St. Leonards Clinic, is a premier facility that is expected to provide improved patient’s comfort and will replace Northside Clinic. Moreover, the company has approved 39 consulting suites, 340 gross beds and 24 operating theaters. Additionally, the brownfield expansions that are completing in FY 19 comprise of 30 consulting suites, 333 gross beds and 15 operating theaters.

New Growth Areas: RHC is planning to grow the adjacent businesses like pharmacy in Australia and patient transport in France which will help to grow the core strategy and will help the company to deliver enhanced and integrated services to the patients.

Decent Financial 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 5.4% increase in the Group Revenue to $9.2 billion and 6.2% increase in Group EBITDA to $1.4 billion. The company has declared 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%. Moreover, in Australia, EBIT grew due to the disciplined cost management strategies and the company’s focus to further improve the operational efficiencies and also due to some one-off benefits. The Ramsay Pharmacy Franchise Network has expanded in FY 18  and the number of pharmacy franchises in the network has reached 54. Additionally, the joint venture with the US-based Ascension Health, which the company announced during the FY 18, has now commenced operations.


FY 18 Financial Performance (Source: Company Reports)

Future Outlook: RHC expects challenging conditions to continue in FY 19, and the company has lowered the forecast than normal earnings growth, however there are some positive signs for future growth particularly in the UK (while Brexit scenario is to be borne in mind). 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 is looking at new strategies leveraging on the core competencies. The company has committed to spending more on brownfield to meet the growing and ageing populations. Additionally, for FY 19, the Australian brownfield programme is expected to deliver $242 million in completed projects. These projects are expected to contribute materially to growth beyond FY19. There will be neutral impact from the acquisition of Capio in FY19. Barring unforeseen circumstances, RHC targets positive Core EPS growth of up to 2% in FY 19.

Industry Outlook across key continents: RHC’s Australian hospitals are performing well despite the challenging environment on the back of the company’s strength and diversity of portfolio. The industry is facing the affordability issues and ongoing negative focus due to private health insurance. The company in FY18 had maintained the admissions growth above industry but below long term trend. RHC is maintaining its focus on innovation and cost optimization strategies. In Australia, the long term industry fundamentals are expected to continue to accelerate the 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. The large scale restructuring programme is planned to centralize the non-core hospital functions. In UK, there is a challenging operating environment due to NHS cost constraints and referral management schemes. Currently, there has been significant downturn in NHS volumes. However, Ramsay UK remains as the market leader in electronic GP referrals. The company is focused on clinical leadership and cost efficiencies. The company has recently announced significant extra funding for NHS. The growing market scenario is very competitive in Asia. In Asia, the company is showing strong operating performance and is controlling cost in key focus area. There is a ramp up of brownfield developments and there is a great long term growth opportunity for RHC in Asia. Additionally, in all regions around the world, the health spending is rising as the populations are growing and aging, the technologies are improving and now a days patients are more informed. Further, the demand for health care is going to increase at the faster rate than the capacity of the sector itself. The number of people aged over 65 have risen to more than 656 million, or 11.5% of the total population. Globally, there has been rapid growth in the chronic disease prevalence, most specifically, cancer, heart disease, and diabetes.

Key Appointments: RHC has appointed Ms Alison Deans as a non-executive director, who was the first managing director of eBay Australia, the CEO of ecorp and was also the CEO of netus.

Stock Recommendation: Meanwhile, RHC stock has risen 6.80% in three months as on January 18, 2019. The company’s stock is trading at A$58.07 and has an immediate support around $56 and resistance at around $59 level. RHC anticipates that growth initiatives of the company, with brownfield expansions and investments will strengthen the business, and will contribute strongly to earnings beyond FY19. RHC’s Australian hospitals are performing well despite the challenging environment on the back of the company’s strength and diversity of portfolio. With consensus EPS for forward 24 months projected to be in low single digit, a stock price upside of mid-single digit (%) is expected for RHC on the pretext of challenges expected with margins under slight pressure while revenue momentum is expected to be on an improving side in the long run. The EBITDA margin and net margin have been above industry medians and return on equity is also above the industry levels, despite the tough conditions witnessed in 2018. With UK NHS volumes expected on a better side considering rise in number of patients on waiting lists and time to treatment, and other jurisdictions trending at a decent level, RHC might witness short-term challenges but long-term view looks prospective. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 58.07.


RHC Daily Chart (Source: Thomson Reuters)

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