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Analyst: Vincent Cook, Portfolio Manager - ASX 100, Clime Investment Management

Ramsay Health Care (RHC) is a global provider of health care services, predominantly in a hospital setting. The company’s global network spans 10 countries, over 500 locations and with over 77,000 employees. RHC is the largest private hospital provider in both Australia and France, with assets also in the UK, Denmark, Norway, Sweden, Italy, Indonesia, Malaysia and Hong Kong. RHC has a reputation for high standards of quality and safety, with an operating philosophy long known as the “Ramsay Way”. While the stock is not currently in Clime portfolios, it is viewed as a high-quality business and is on our watchlist of opportunities. This note reviews the impact of the pandemic on RHC and the potential tailwind in coming periods of significant waitlists across its geographies of operation.

The pandemic has impacted RHC on both the revenue and cost side, although revenue impacts have been offset by government support. Conditions remain challenging, as highlighted by the recent trading update. September quarter net profit declined by 40% on the prior corresponding period to $58m, reflecting significantly higher costs as well as disruption to activity levels.

That said, the long term drivers of demand growth for RHC remain firmly in place. The company recently upgraded CapEx guidance, reflecting the opportunities for brownfield expansion to meet growing demand. Moreover, there is a significant backlog of potential work across RHC’s geographies of operation. Management noted this week that the NHS waiting list in the UK has increased from 4 million patients pre-pandemic to approximately 10 million currently.

The key to earnings recovery for RHC is to reset the cost base closer to pre-pandemic levels and match costs with hospital admissions. Management noted that up to one-third of elective surgery procedures in the UK were cancelled at the last minute in the September quarter, as the public remains wary of returning to hospitals while COVID case numbers are persistently high. With last minute cancellations, it is impossible to manage staffing costs in line with revenues. Compounding this is a shortage of nurses across geographies and particularly in Europe. This is likely to be the most structural of the issues confronting RHC. Nursing has always been a tough job and the stress of working through the pandemic has caused many to leave the industry. RHC has had to fill positions with higher cost, agency staff – short-term casual workers.

Other aspects of the elevated cost base will be easier to tackle. RHC is currently running personal protective equipment costs at $60m per annum above pre-COVID levels, down from a peak of approximately $96m. This adds to other items such as elevated cleaning costs, while management is confident that they can revert to pre-COVID costs in these areas.

The demand side should only be a matter of time. As shown below, the number of COVID patients in hospitals is now well down from peak pandemic levels. Vaccination rates are high across RHC’s geographies and new drugs have been added to the tool kit to limit the seriousness of infection. The demand for elective treatments has not gone away and confidence should continue to recover.

 

RHC raised $1,500m in the first half of 2020 to support the business through the pandemic. This increased shares on issue by 12% but also means that the balance sheet is in good shape. Net debt as of June 2021 excluding lease liabilities was $2.4bn, well down on the $4.8bn at June 2019.

In terms of valuation, RHC is trading on a consensus forward PE of 30x, compared to a five year average of 24x. However, this is misleading as a significant earnings recovery is expected in FY2023. Consensus is targeting 50% earnings per share growth in FY2023. On an FY2023 basis, the stock is trading on 24x, in line with the five-year average. Meanwhile, valuations across the market have expanded to reflect the lower interest rate environment. As an example, CSL is now trading on a 43x forward PE, compared to a five year average of 34x. As RHC earnings recover, Clime expects this business to trade on a high 20s PE, which provides scope for share price appreciation if and when those earnings come through.

RHC forward PE

Source: Factset

 

 

Ownership Disclosures: 
Our fund partner Clime Asset Management (Clime) owns (RHC) on behalf of various mandates where it acts as an investment manager.

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