Efficiency Measures Key To Ramsay’s Outlook

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

Weakness in Europe and headwinds in the Australian private health industry buffet Ramsay Health Care but broker reactions to the FY18 result and outlook vary widely.

-Australia required to drive a turnaround in FY19
-Has the worst passed for offshore operations?
-Contributions from re-developments should occur in FY20
 

By Eva Brocklehurst

The camps are dividing regarding the outlook for Ramsay Health Care ((RHC)) as the business withstands headwinds from multiple sources. Australian growth stood out in FY18, while France was flat and the UK continued its downward spiral.

Asia-Pacific operating earnings (EBITDA) grew 12% in the year while the UK slumped -26% and France grew 3%. Ramsay Health Care expects the French performance in FY19 to be similar to FY18 while the UK trends indicate more downside.

Morgan Stanley estimates the company's FY19 growth guidance of 4-6% implies 7-10% growth in Asia-Pacific, and this forecast occurs in an environment where volumes are subdued, margins may be flat and there are only small incremental contributions from pharmacy. Moreover, no material benefit from brownfield developments is expected until FY20.

In Australia, private health insurance growth is negative and Morgan Stanley expects volumes in private hospitals will trend lower for longer. The broker finds little that is compelling in the stock and maintains an Equal-weight rating.

Deutsche Bank suggests FY19 will be somewhat of a transition year amid guidance for just 2% growth in earnings. After that, the broker suggests growth should move up to 6%, supported by procurement savings and brownfield developments. Credit Suisse forecasts FY19 operating earnings growth of 3.5%, based on continued subdued system growth in Australia as affordability of private health care remain stretched.

Guidance disappointed CLSA, which calculates organic earnings growth has been declining since 2015. The broker now assumes Australia will have to drive the turnaround and, while this will need to occur through further operating efficiencies, Ramsay Health Care may face difficulties amid repercussions from the most important stakeholders, the doctors.

UBS points to data from the Australian Prudential Regulatory Authority, which shows a further deterioration in industry dynamics in Australia, and suggests reform measures will have limited impact on the perceived lack of utility in private health insurance. As such, the ability of Ramsay to meet guidance in FY19 will depend more on the success of further efficiency measures than on any recovery in top-line growth.

Citi agrees there are several challenges in the Australian private hospital sector, most of which are out of the control of the operators. These include declining membership of private health, private patients treated in public hospitals and high out-of-pocket costs.

The broker is positive on the sector in the longer term, noting around 55% of all procedures in Australia are conducted in the private system. Both federal and state governments cannot afford for this percentage to be materially lower as healthcare budgets are a stretched. Still, with a federal election in the next nine months, and no immediate solution likely, Citi expects pressures on the industry will continue for the short to medium term.

Despite signs the worst may have passed for offshore operations, Ord Minnett is also cautious about the outlook because of the risk of further deterioration in Australia. Domestic activities could slow as patients seek to avoid rising out-of-pocket charges, while rate and price pressure appears inevitable if Labor wins the next federal election, given its policy plans.

The broker acknowledges management has guided conservatively but suggests core earnings per share may well contract in FY19 as interest and tax charges rises, albeit they may recover thereafter. Still, a recovery is likely only to be mid single-digit growth without an acquisition.

Morgans takes a different stance, suggesting the rest of the world is struggling, while the domestic business is performing well and sustaining revenue above the market. The broker cites expanding margins, despite softer overall volumes, and more day versus inpatient admissions contributing to robust earnings growth. Morgans accepts there is likely to be limited near-term improvement in the affordability of private health insurance and FY19 guidance may prove optimistic, as it requires Australia to do the heavy lifting.

Europe

After several years of flat to contracting earnings, Ord Minnett expects European operations will lift slightly in FY19 and France should benefit from less severe tariff rates. UK earnings should be supported by the onerous lease provisions.

It is on this subject that Credit Suisse is more concerned and considers the stock overvalued. The broker believes the quality of earnings is in question, with continued lease provisions, restructuring and other costs being excluded from core earnings.

CLSA expects a flat margin in the UK and a decline in operating earnings in France. Nevertheless, the broker, not one of the eight stockbrokers monitored daily on the FNArena database, holds a positive view for the medium term.

Near-term headwinds are considered outweighed by the positives involved in the company's plan to open 15 operating theatres in FY19 that will have a direct benefit to earnings, as will the rise of private mental health offerings in Australia. CLSA expects issues in France to be resolved, as the Macron government looks to stabilise reimbursements.

A blow-out in waiting lists for the UK NHS should benefit volume growth for Ramsay Health Care and there should be more procurement synergies. All this keeps CLSA on a Buy rating with a $70.35 target.

Organic Growth/Acquisitions

Macquarie's Outperform rating is underpinned by the expectation that contributions from brownfield developments and incremental operating efficiencies will support growth into FY20. The potential acquisition of Capio also provides additional earnings growth. An update on the offer for Capio is expected in early September.

A modest contribution from upgrading existing accommodation is assumed in FY19 and the projects that will be completed are anticipated providing more material growth from FY20 onwards. Management has highlighted a continued focus on acquisitions and has the balance sheet capacity for these options, Macquarie points out.

Morgan Stanley estimates a successful transaction on Capio could be around 2.3% accretive in year one. Ramsay has reiterated the deal is conditional upon Capio not divesting assets. Capio has announced exclusive negotiations with Vivalto Sante for the sale of its French operations.

FNArena's database shows three Buy rating, four Hold and one Sell (Credit Suisse). The consensus target is $57.47, suggesting 3.5% upside to the last share price. Targets range from $47.20 (Credit Suisse) to $68.00 (Macquarie).

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