Rudi's View | Mar 22 2017
In this week's Weekly Insights:
-Ramsay Health Care: Rumour, Hearsay, Speculation, Innuendo, and Rubbish
-Conviction Calls: GS, CS, DB, Morgans, UBS, MS
-Aus Retailers: Next Up, The Accountancy Disruption
-New Website: Mobile Devices
-2016 - L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
Ramsay Health Care: Rumour, Hearsay, Speculation, Innuendo, and Rubbish
By Rudi Filapek-Vandyck, Editor FNArena
We all know the share market as the public forum in which smart thinkers figure out the RBA is going to lower/hike interest rates well before the RBA comes to its decision. It's where smart money starts new trends before anyone realises the old is about to become new, and vice versa.
That's how the market is being sold to us; how the stories are being told, time and again.
But the share market is equally the place where share prices move on group-think, led by rumours, hearsay, baseless speculation, innuendo and unfounded fear.
In recent weeks, shares in Ramsay Health Care ((RHC)) have come under pressure ever since the company announced MD & CEO of nine years, Chris Rex, intends to retire later this year, and no successor has as yet been appointed. Then both departing CEO and the CFO started selling shares.
Plenty of room for unrestricted speculation about what all this can mean? And there the share price went from circa $78 (already down from $84) to $62 in three weeks. Any sideline observer who believes "the market is always right" would have drawn the conclusion the company is about to issue a profit warning, or something similar. Surely, when a share price of a Blue Chip that is Ramsay Health Care comes down by more than -20% something must be amiss, somewhere?!
On Friday, it appeared someone, somewhere had decided enough is enough, and a strong rally back into the mid-$60s ensued.
Maybe that someone works for stockbroker Morgans and issued a fierce rebuke of all the fear mongering that was going around the traps during that time?
Below is a brief summary, and my own interpretation, of stockbroker Morgans response to the share price weakness in Ramsay Health Care surrounded by the wild market rumours swirling around to justify the falling share price.
1. The CEO is leaving and nobody's ready to replace him. Yep. Board members could have done a better job, but note they are confident they will find a suitable, strong candidate, either outside or inside the company, which is far from a one-man operation. This is one of the largest private hospitals operators in the world, and one of the best too.
2. Insiders are selling shares. Are the rats leaving a sinking ship? Probably the most confusing rumours had it the Paul Ramsay Foundation, owner of 32% of RHC capital, was selling shares to set up a political think tank, the Ramsay Centre for Western Civilisation. As it turned out, this is complete rubbish. The foundation even felt compelled to issue a statement to the ASX about it. Morgans points out the CEO selling shares was well flagged and the CFO is selling to cover tax obligations because his shares are coming out of a trust in which they'd been held for seven years.
3. The Australian government is ready to clamp down on healthcare costs. Again rubbish. For good measure: Morgans doesn't actually use these words, but it is clear from reading in between sentences, they'd like to. The company has repeatedly indicated the pending protheses list review won't have any material impact and new health minister Greg Hunt seems to have a better grip on things than his predecessor, Susan Ley, while having spoken at length with Ramsay.
4. EU pricing headwinds are making life more difficult. More rubbish. Morgans points out the latest pricing cuts in countries such as the UK and France were less severe than in prior years and -equally important- in line with expectations. Management nor the analysts have seen a reason to amend group guidance for the present year.
5. Public hospitals are grabbing private insurance patients from private hospitals. More rubbish, apparently. Morgans received intel from Ramsay Health Care this "grabbing" has been going on for years now. Nothing new under the sun. It is the company's belief these privately insured patients predominantly enter public hospitals through the emergency ward.
The real clanger, however, is the price chart below. Its underlying thesis is that, in the long run, share prices of CSL ((CSL)) and Ramsay Health Care tend to move in unison and whenever one deviates from the other, a catch up move is surely to follow next. Even if we were to assume CSL shares might be ripe for a pullback after the strong rally in the first three months of the year, there's now a sizeable gap between the two, even larger than the one that occurred early last year.
It should be no surprise both Ramsay Health Care and CSL are considered cornerstone holdings by FNArena/Vested Equities' All-Weather Model Portfolio. Recent weakness in the share price has been used to buy more shares.
Conviction Calls: GS, CS, DB, Morgans, UBS, MS
Sell Bellamy's ((BAL)), Buy Ingenia Communities Group ((INA)), say small cap specialists at Goldman Sachs. Both are being presented this week as the stockbroker's "Best small cap ideas". The need for further discounting makes the specialists question company guidance for the second half, in the case of Bellamy's, while Ingenia should have a very strong FY18 and its valuation is not yet reflective of this.
Over at Credit Suisse, strategist Adnan Kucukalic has now added Computershare ((CPU)) to its Australia Top Picks "long" ideas. Computershare is highly cash generative, which makes it attractive for investors, says Kucukalic. The company should benefit in years ahead from the US Property Rationalisation cost program and strong growth in the US and UK mortgage servicing businesses, on top of cost cutting.