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Ramsay feels some pain

Paul Rickard
February 28, 2018

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It’s hard work being a “market darling”, particularly when you have a track record of surpassing market expectations. When you then miss – even if it is only a small miss – the market can be pretty punishing.

That’s what happened yesterday to Australia’s largest private hospital operator, Ramsay Health Care, when it reported that its core earnings for the first half had grown by 7.5% to $288.0m and core EPS (earnings per share) by 7.8%. This was below Ramsay’s guidance range for the full year of an increase of 8.0% to 10.0%, and its shares were sold off, losing 5.75% on the day or $3.90 to close at $63.90.

Analysts had been expecting Ramsay to do better, with consensus forecasts for the full year dividend to grow by 14.3% (Ramsay lifted its interim dividend by 8.5% to 57.5 cents per share), and top line revenue growth of almost 7% for the Australian hospital division (Ramsay achieved top line growth of 4.3%).

But it did reaffirm full year guidance of cores EPS growth of 8.0% to 10.0%.

So, how should you play Ramsay? Firstly, let’s take a closer look at the results.


For Ramsay, the result is a tale of two continents. A strong performance in Australia due to cost efficiency programmes, and a weak performance from France and the UK where revenue fell.

Overall, Group revenue grew by 3.0% to $4.4bn, EBIT by 1.5% to $470.4m and Core NPAT by 7.5% to $288.0m.

Australian hospitals, which contribute 55% of Group EBITDAR, lifted earnings by 9.1%. Although revenue only grew by 4.3%, Ramsay was able to improve its EBIT margin from 14.6% to 15.3%, mainly due to operational efficiencies and a cost restructuring programme implemented over the last 2 years. By way of comparison, Ramsay’s main competitor, Healthscope, saw its margin get crunched from14.3% to 11.6% in the December half.

Looking ahead, Ramsay expects continued volume growth, and says that the recent focus on improving the value and affordability of private health insurance will be a positive for the sector. It says that the reimbursement environment with the private health funds is stable, with most arrangements negotiated in FY17 with multi-year terms. It is also sees opportunities with non-hospital earnings – pharmacy being an example, where it now has 54 pharmacies.

Brownfield developments to hospitals and clinics (beds, theatres, suites) remain a key part of the growth strategy, with $57m of work completed in the first half, $147m set to open in the second half, and $156m in the first half of FY19. The company is currently considering expansion business cases worth over $500m, including a major expansion of the Joondalup Health Campus in Perth.

The French hospitals’ business, which accounts for 35% of Group EBITDAR, saw revenue decline by 1.1% to 1,066m. EBITDAR fell by 5.8% from 206.1m to 194.1m. According to Ramsay, overall admission growth and strong cost management mitigated the negative tariff setting.

In a slightly more upbeat assessment, Ramsay says that the tariff decrease slated for March 2018 is a little lower than anticipated. They are progressing a centralisation programme in France, which will see functions such as finance, admin and HR removed from hospitals and located in a separate shared service centre. When implemented, this is expected to save £5m pa.

UK hospitals were impacted by NHS (National Health Service) demand management strategies, with revenue falling by 4.8% to £206.2m. EBITDAR fell by 4.6% to £49.4m – about 10% of the Group. A positive tariff adjustment will take affect from 1 April. On the volume front, Ramsay expects normal volume growth to return in the short to medium term.


Going into the results, the Brokers saw upside in Ramsay. According to FN Arena, there were 2 buy recommendations and 5 neutral recommendations, and a consensus target price of $73.26 (see table below – data sourced from FN Arena).

Broker Recommendations (prior to result)

Brokers were also forecasting earnings per share growth of 9.8% in FY18, and a further 9.5% in FY19.

With the December half result a little less than anticipated, and ongoing challenges in Ramsay’s European business, the coming days will probably see brokers make some minor downgrades to earnings forecasts and target prices.


With attractive demographic sector fundamentals, combined with their very strong record of execution, I have long argued that Ramsay Health Care should be a core stock in your portfolio. While the December result was a little disappointing, Ramsay’s reaffirmation of full year guidance is important, and I can’t see cause to change my view.

On last night’s close at $63.90, Ramsay is trading on a multiple of 22.2 times FY18 earnings and 20.4 times forecast FY19 earnings. It is not that cheap, and with earnings growth slowing (from the low teens to high single digit over the next few years), the risk is that there may be a further PE de-rating.

I think that this is unlikely, with fund managers looking at any price weakness as an opportunity to top up. A hold for me at these levels – buy in market weakness. 

Published: Thursday, March 01, 2018

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