Softer Growth Outlook For Ramsay

This story features RAMSAY HEALTH CARE LIMITED. For more info SHARE ANALYSIS: RHC

Weaker demand at Australian hospitals has affected Ramsay Health Care and broker opinions diverge on the strength of the outlook.

-Pharmacy and cost management smoothing transition to lower growth in Australian hospitals
-Yet sector reform required to improve industry dynamics
-Citi assesses valuation as the most attractive in five years
 

By Eva Brocklehurst

Ramsay Health Care ((RHC)) will need a strong boost to earnings in the second half to achieve guidance although this is expected to come from re-developments and acquisitions in the Australian business.

The company has maintained guidance for FY18 operating earnings growth of 8-10%. On Ord Minnett's estimates, Ramsay will need to boost second half domestic earnings by more than 11% to deliver the bottom end of guidance. Nevertheless, this should be achieved, as pharmacy acquisitions boost revenue and new capacity comes online.

The company expects to open $147m in brownfields developments in the second half and $156m in the first half of FY19, which should add significantly to revenue. Citi notes the company's expansion projects have been successful and enabled above-market growth over the past eight years.

Ord Minnett found the results solid, at least relative to domestic peers, although the business was clearly affected by weaker demand. Yet, the broker is increasingly cautious regarding the political risk in the domestic hospital sector, amid further downside risk from moderating demand.

Hence, a downgrade to Hold from Accumulate. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, expects the company will be able to grow, but at a slower pace in FY19 and has reduced its rating to Outperform from Buy. The target is lowered to $74.50 from $81.20.

The low quality of the result disappointed Credit Suisse and despite the Australian hospitals being in a strong position, the broker does not envisage an improvement in industry dynamics until meaningful sector reforms are introduced.

The broker's revised growth estimates of 8.4% sit at the lower end of the management guidance range and the stock is considered fairly valued on a risk-adjusted basis, given the industry headwinds.

UBS agrees the sources of earnings leverage were poor quality, but from a cash flow perspective the result was solid. The broker envisages little change at the industry level in the second half and growth should be augmented by developments and new pharmacies. The broker estimates that excluding procurement savings, Australia's first half earnings growth slowed to 3-4%.

Domestic admissions are above market trends, Morgans notes, despite declining private health insurance memberships, and there are more day admissions versus inpatients. Meanwhile, procurement savings are on track to reach $80-100m.

Macquarie also expects contributions to come from projects completed in the first half and this will combine with revenue from pharmacy acquisitions to underpin revenue growth in the second half. The broker forecasts 10%.

Acquisition Opportunities

Acquisition opportunities continue to be assessed across a number of regions and Macquarie calculates there is around $650m available for potential acquisitions. The broker maintains a positive investment view based on revenue growth in Australian hospitals, operating earnings margin expansion and the balance sheet capacity.

Morgan Stanley is less sure about the outlook but acknowledges support for the stock because of a scarcity of growth in large caps, while the company's propensity to acquire or consolidate hospital assets in growth markets prevents a more bearish view on earnings.

In contrast, Citi upgrades to Buy from Neutral and prefers the stock in the hospital sector. Valuation is considered the most attractive in five years, relative to the historical average. Citi acknowledges the deceleration in the profit growth profile, but expects a positive shift in momentum in the Australian business will outweigh a weak offshore performance.

Offshore

The declines in operating earnings in France and the UK were attributed to soft volume and price pressure from decreasing tariffs. Tough conditions are expected to persist. While Ord Minnett is confident the management issues in the UK NHS should reverse in time, Credit Suisse expects pressure on NHS volumes will continue as elective waiting lists expand.

Morgans suspects management is attempting to adjust its cost base against soft volumes and pricing headwinds in the rest of the world. In France, a $62.6m 3-year restructuring is being undertaken to centralise non-core hospital functions and this appears to come with little return on investment.

In the UK, less predictable than France, management has only cited a return to normal volume growth over the short to medium term, which Morgans suggest is a little opaque and may prove optimistic.

FNArena's database shows two Buy and five Hold ratings. The consensus target is $69.84, signalling 11.5% upside to the last share price. Targets range from $60.00 (Morgan Stanley) to $78.50 (Citi).

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