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Treasure Chest: Primary Care For Ramsay?

Treasure Chest | Sep 18 2019


FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Could Ramsay Health Care benefit from expansion into the Australian primary care business?

-Several large medical centres in Australia could provide acquisition fodder for Ramsay
-Opportunity to diversify revenue stream from private hospitals?
-Volume growth in private system supported although price increases likely to be reduced


By Eva Brocklehurst

Ramsay Health Care ((RHC)) intends to further integrate its business with out-of-hospital care and Citi poses the question of whether it could acquire an Australian primary care business.

While Ramsay owns a small network of pharmacies, it could also partner with other organisations or ventures adjacent to the core hospital business. For example, through the acquisition of Capio, the company entered the primary care market in Scandinavia.

The primary care business can provide GP referrals to specialists that work in the Ramsay Health private hospitals, and in Australia there are several large-scale medical centres with a variety of owners that could provide acquisition potential, Citi observes.

Given a multiple of 10x operating earnings a transaction could be accretive, albeit dilutive in terms of return on invested capital (ROIC). Still, with strategic benefits such financial outcomes should be acceptable to shareholders, the broker adds.

Assuming the strategic benefits, ownership of a primary care business by a highly regarded brand like Ramsay Health Care in Australia would also create value over time. The funding of primary care through the federal government can provide a revenue stream that is not under the same pressures as the private hospital industry faces.

The company has invested $563m in its brownfield assets over the last three years and Citi expects this should start to contribute meaningfully from FY20, resulting in higher profitability.

Continuing to forecast the company completing $200m per annum in brownfield projects, Credit Suisse is more cautious about whether there will be demand for this level of investment in a subdued operating environment. The broker also questions whether Ramsay can continue to earn the same level of returns (15% ROIC) it achieved historically, and ascertains that margins and returns have been diluted by recent acquisitions.

Private Hospitals

The latest data from APRA indicates growth in private hospitals decelerated to 2.8% in the second half of FY19 compared with the 3.3% growth reported by Ramsay, which signals growth the company is gaining share. UBS considers the outlook for private hospital volumes and price is the driver of the stock, as Australia represents around 78% of FY20 group earnings forecasts.

An ongoing deterioration in private health insurance participation is expected to pressure the public hospital system and ultimately lead to sustained volume growth for private operators. Hence, the risk for private hospital operators such as Ramsay centres on price not volume, UBS believes, and whether increases from insurers are sufficient to offset cost inflation.

Citi agrees that,\ while the private health stream should support volume growth and governments cannot afford the number of procedures in private hospitals to drop much lower, this is negative for the private health insurers and, ultimately, should result in lower price increases for private hospitals.

Credit Suisse recently upgraded to Neutral from Underperform, as the shares are trading in line with the target and there is no longer a catalyst in sight for the stock to de-rate from these levels. Having assessed the utilisation of public hospitals on the eastern seaboard to determine if the public system is keeping up with higher demand, the broker maintains a negative stance on the Australian private hospital industry.

Demand for elective surgery in public hospitals has continued to rise but, as long as the system is coping, there is limited near-term upside for Ramsay Health, in the broker's view. There are no signs that demand trends are likely to change and, anticipating weaker private hospital volume growth,Credit Suisse was gold believes Ramsay needs to focus on procurement savings in order to maintain flat Australian hospital margins.


Meanwhile, in France and the UK, tariff increases should be of benefit to Ramsay and Citi suspects the integration of Capio could result in higher synergies beyond the forecast EUR20m. UBS estimates UK NHS e-referrals represent around 79% of Ramsay's UK admissions and, combined with the tariff increase on April 1, should provide for reasonably strong growth in UK revenue.

Citi may have a Buy rating but the remainder of FNArena's database comprises six Hold ratings. The consensus target is $68.30, suggesting 10.3% upside to the last share price. Targets range from $61 (Morgan Stanley) to $74 (Citi, Ord Minnett).

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