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Subdued Recovery For Ramsay Health Care

Australia | Nov 16 2020

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

Ramsay Health Care does not expect a substantial increase in activity going forward, amid a subdued recovery in Australian surgical admissions. Europe is unlikely to contribute to earnings growth in FY21.

-Key issue is as to when Australian volumes return to normal
-Some cost increases likely to be permanent
-Highly probable government contracts in the UK/France will be extended


By Eva Brocklehurst

As hospital admissions in Europe spiral higher, Ramsay Health Care ((RHC)) remains cautious, refraining from providing FY21 guidance in its first quarter update. Australian revenue was up 1.5% in the first quarter, which included a 1.7% increase in surgical admissions that was offset by lower non-surgical treatment.

While the update lacked specifics, JPMorgan was encouraged by the rising surgical volumes in Australia. The broker had expected a recovery in volumes would be evident across all operations in early 2021 but this is unlikely to be the case in UK and Europe amid the second wave of infections.

Operating earnings declined, with commentary signalling a figure of around -$50m, because of restrictions on Victorian activity and an increase in costs as a result of the pandemic. Credit Suisse assesses operating earnings declined -$55-60m. As a result a -$90m decline in the first half is anticipated, amid some benefit from the re-opening of Victoria in the second quarter.

While not expecting a significantly higher level of activity going forward, management is learning from doctors there is more confidence regarding a return to elective surgery. This will be the key issue for Morgan Stanley, as its investigations signal there is softness in new specialist activity. Restrictions on elective surgery in Victoria are to be lifted on November 23.

Citi finds it hard to estimate just how much surgical volume will be about "catch up", although Victoria could definitely have a backlog to work through. The issue is just how quickly Australian surgical and non-surgical volumes normalise, as European earnings are expected to be neutral to net earnings in FY21.

Ramsay Health Care's relationship with the public sector has improved as a result of the pandemic, as the private sector has been doing more short-term work in Queensland and NSW. Nevertheless, longer-term agreements are yet to materialise.

UBS finds it difficult to forecast earnings for the short term because of the complexities across the regions in which the company operates. Longer term, the broker considers organic private hospital volume growth will return to 2-3% and the usual drivers such as demographics and chronic disease will remain supportive.


Macquarie is positive about the outlook, noting Australian operations are improving, but acknowledges costs are elevated because of the impact of the pandemic and the associated increased use of protective equipment (PPE), extra cleaning and additional staff. This equates to added costs of around -$8-9m per month.

JPMorgan was surprised by the higher domestic costs but remains confident the impact will diminish over coming months as prices for PPE normalise and the pandemic crisis recedes.

There was no indication how permanent the pandemic-related costs will be. Credit Suisse suspects there will be some costs that remain stubborn and calculates an impact on margins by around -150 basis points compared with pre-pandemic levels.

Some volume increase will help offset the costs but the broker does not expect Ramsay Health Care will return to pre-pandemic margins before FY24. Management is attempting to alleviate costs by installing automated temperature testing and app-based registrations, rather than employing people at the entrance.

Wages are likely to increase by around 2% UBS points out and amid the focus of insurers to shift the mix of cases, agrees recent peak operating margins may be difficult to retain.

The company's capital raising has provided flexibility but where this will be deployed is not straightforward, the broker adds. Without any significant change to incentives or clinician preferences for operating in stand-alone premises, increased exposure to certain areas may not necessarily improve group returns.

The broker suspects the current rate of growth across admissions is a sign that a better place for capital expenditure may be towards improving day services. Ramsay is still in negotiations with Medibank Private ((MPL)) but the CEO has indicated progress is being made.


Offshore, earnings pressure remains significant as hospitalisations accelerate in Europe.The company's French business, Ramsay Sante, reported surgical volume growth of 5.4% although non-surgical activity was weaker. Currently Ramsay Sante is treating over 900 covid-19 patients, with more than 320 in critical care.

Ramsay UK revenue was down -9.9% although volumes improved late in the September quarter. JPMorgan calculates the impact on valuation is minimal, and reduces forecast to simply reflect a delayed recovery.

The UK and France continue to operate under government support arrangements which currently run until the end of the year. Brokers consider it likely that these contracts will be extended in both the UK and France. In the UK there is the chance of doing more public work but the tender process for the National Health Service backlog is slow. Some tenders could be announced early in 2021.

FNArena's database has two Buy, four Hold and one Sell (Morgan Stanley) for Ramsay Health Care. The consensus target is $68.59, signalling 1.5% upside to the last share price.

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