Stock of the Day – Ramsay Health Care (Expensive)
Ramsay Health Care Limited (RHC) is a private hospital operator with about 151 hospitals and day surgery facilities across Australia, The United Kingdom, Indonesia, and France. It has large metropolitan facilities, veterans’ hospitals, clinics, rural centres, psychiatric units, etc. running under its umbrella. As part of its recent activities, RHC is exploring the opportunity to provide service to ageing population through its program of brownfields expansion.
As per FY14 results, RHC declared revenues of $4,909m, which is 18% high with EBITDA growing ~16%. Core NPAT of $346m (19% up) has been realized as otherwise expected from the guidance of 16-18%.
Financial Performance (Source: Company Reports)
The Company’s net profit attributable to the owners of the group for the year ended 30 June 2014 was $303.8 million, a 14% increase from a year before. Earnings per share is 144.1 cents for the year, a 15.2% increase. Operating cash flow of A$561.5m was strong and led to a 22.9% increase in the final dividend, which was 51¢ with full year dividend of 85¢.
Dividend (Source: Company Reports)
Factors including, but not limited to, strong performance across global portfolio; the acquisitions of hospitals in France (Medipsy) and Asia (JV with Sime Darby) under global expansion strategy; capacity expansion initiatives; broad divisional performance; cash flow generation; and operating leverage, cumulatively strengthened RHC’s FY14 results.
Looking at the Australian and Asian business, the revenue growth of 10.5% increased to $3.8 billion and EBIT growth of 14.8% increased to $480.2 million for the year ended 30 June 2014. This was the result of strong revenue and admissions growth, cost control initiatives and an enhanced impact from completed brownfield activities. The Company approved $172mn of brownfield capacity expansions at Australian Hospitals in FY14. There exists an increase in demand for health care in light of expanding population and the increased chronic disease risks. Specifically, RHC’s new developments such as Peel Health Campus, Sunshine Coast University Private Hospital, A$133m Joondalup, A$47m expansion of Greenslopes and so forth, have added feathers to the hat of success. Many of the new developments come under the forte of public-private partnerships (e.g., Joondalup WA, Noosa QLD, etc.), and have promoted RHC’s growth potential. Future growth is also expected to be stemming from developments at St George, Lake Macquarie, Pindara, Beleura and Peninsula Private Hospitals.
Company’s European operations highly impacted the overall performance of FY14. The UK business performed strappingly well with EBIT growing 11.1% to £35.3 million. There has been an increase in EBITDAR margins from 25.5% to 25.7% in view of the continued NHS referral growth.
The Company witnessed EBIT increase of 85% to €26.2 million in France, primarily based on improvement of existing operations along with contributions from the Clinique de l’Union (acquired in June 2013) and the Medipsy psychiatric facilities (acquired in mid-December 2013).
Sales at RHC were A$4.91 billion, an increase of 17.6%; and faster than its competitors (Healthscope Limited, Primary Healthcare Ltd, Envision Healthcare Holdings Inc.). From the past 6 fiscal years, the stock has increased in value year-on-year. For the 52 weeks ending 5 September 2014, the stock was up 43.8% to A$52.37. RHC’s market capitalization is A$10.51 billion.
Each of the above strategic move speaks leaps and bounds for the Company. For example, the strategic decision of acquiring Générale de Santé (GdS, a leading French hospital operator) has been a boon for the Company. The Company has come to terms for the A$1.1bn conditional deal with the JV partner Crédit Agricole Assurances (CAA) for a majority stake in GdS. This gives RHC an opportunity to develop a successful franchise despite the subdued tariff environment. It is to be noted that the bid is subject to French anti-trust approval. RHC announced that it expects a nine-month contribution from GDS to its FY15 accounts.
The recent addition of Sime Darby’s portfolio of assets in Malaysia (three hospitals and a nursing and health sciences college) with RHC’s three Indonesian hospitals is another star. The Company also indicates penetration throughout Asia with focus on Southeast Asia (e.g., Vietnam, China). It has further signed long-term contracts with major insurers, which contributes to the Outlook for PHI rates.
Few other things constitute, pending decision on Northern Beaches Hospital tender wherein RHC is not expecting a positive outcome; and renegotiated deal with Medibank private.
Overall, Company’s management is ready to canvass more of such opportunities/ acquisitions with high potential though the market may look substantially consolidated.
Business Strategies and Prospects for Future Financial Years (Source – Company Reports)
The expedition of brownfields projects while obtaining high earnings from new facilities; unremitting dividend growth; acquisitions in Asia-Pacific region and France; and so forth appear to be the key driving forces going forward. To add to this, impressive spike in all divisions; exportable operating model; and trading in coherence with Asia-based peers are auxiliary catalysts.
RHC Daily Chart (Source - Thomson Reuters)
On another note, RHC’s domestic performance may be estimated from a sneak-peak of the private health insurance/hospital data released by The Australian Private Health Insurance Administration Council (PHIAC) for 1Q CY14 (June quarter), i.e., data on membership coverage rates, episodic growth, average length of stay, and benefits paid are pertinent for RHC. A positive trend indicates a splurge in the growth.
Audited Balance Sheet (Source – Company Reports)
We are, however, a little sensitive with regards to the following aspects - funding, insurer pricing pressure, government policy changes, integration of acquired assets, any future dearth of financial benefits from acquired assets, and relationship with doctors operating at RHC’s hospitals wherein they do not have any obligation to use any of RHC’s facilities.
The Company expects to do well for FY15 earnings given a healthy operating environment, immaculate capacity expansion program, and GdS deal. We believe the stock is expensive at the current price and would review the stock at a later date.
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