Treasure Chest | Mar 03 2021
This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Long-term fundamentals are intact for Ramsay Health Care but views differ on the short-term trajectory as the pandemic still dominates
-Pent-up demand for elective surgery
-Costs, staffing levels remain challenging
-Oz baby boom a boon for private hospitals
By Eva Brocklehurst
The fall-out from the pandemic for the healthcare systems in which Ramsay Health Care ((RHC)) operates continues, despite a moderation in case numbers as vaccines are rolled out. While brokers find it difficult to predict the trajectory of a recovery in elective surgery, long-term demand and the fundamentals underpinning the business are considered intact.
Costs for Ramsay were higher over the first half while government support schemes provided a panacea. UBS notes a significant contribution from government support, particularly in Europe, totalling $635m, and acknowledges the quantum was more than anticipated.
The broker expects a material increase in Australian hospital earnings in the second half. In addition, following the deferral of elective surgeries during the pandemic in Australia, the UK and France a rebound should occur, augmented by the flow from the public sector as pressures on waiting lists intensify.
While admissions are improving, Morgans finds the earnings trajectory is still predicated on the easing of pandemic-related costs and the roll-out of vaccines in the short term. Moreover, the labour market is increasingly challenging and the broker considers the earnings outlook cloudy. Over the longer term there is risk around the evolving integrated care model and hospital "digitisation".
Jarden believes the stock is one of the pure recovery stories that could benefit from vaccine deployment and has been left behind. Anxiety around the pandemic has distorted surgical lists but the broker believes there is no escaping the backlog that should underpin volumes in the next few years.
Macquarie agrees pent-up demand for delayed elective procedures, increased engagement with the public system and brownfield projects/developments all suggest a robust outlook. The broker highlights some weakness in Asia as, while no restrictions were imposed on elective procedures, people's movements were restricted and this affected volumes.
Ord Minnett is also upbeat, expecting the $50m in coronavirus-related costs in the Australian business in the first half will moderate, contributing to improved margins. Citi is less reassured and downgrades to Neutral from Buy, suspecting pandemic-related costs will still affect margins and FY22 is likely to be the "more normal" year.
Morgan Stanley is not persuaded and emphasises, despite improving momentum in admissions, the uncertainty surrounding the hospital system(s) and underlying margin pressure.
In Australia, Jarden expects earnings should be supported by price stability, cost leverage, synergies and scale. The broker cites evidence of an improvement in private hospital volumes from APRA data for the September quarter and ongoing sequential improvement from channel checks during the December quarter, as all Australian states remove the final restrictions on elective surgery.
Citi notes Ramsay Health is not capacity constrained in Australia and there are potential opportunities from public sector contracts, although this will depend on the tolerance for long waiting lists and the impact on the federal budget.
Ord Minnett assesses Europe has also probably passed peak costs in terms of the pandemic, as case numbers moderate. Nevertheless, the broker acknowledges management has warned staffing levels are challenging in these markets because of work fatigue and Brexit.
Europe and the UK remain under government support schemes and Macquarie points out the first half result was complicated by the changes to French government reimbursement. The new French funding agreement will be paid in arrears as opposed to prior funding that was paid in advance, providing a negative cash flow impact.
The UK, with 90% of staff vaccinated by mid February, is likely to benefit from future activity stemming from the record high public health waiting lists and private demand. Yet Credit Suisse envisages a risk to UK earnings as costs for Ramsay are no longer completely covered under the government NHS contract, and lockdowns continue.
There is also risk in Europe with higher labour turnover and costs. As a result, with the shares rallying 7.7% on the day of the company's result release, the broker considers a Neutral rating appropriate.
Jarden notes pricing terms with the private health industry have never been particularly transparent but believes the completion of an agreement with Medibank Private ((MPL)) should augur well for the next few years.
Management has indicated it will look at acquisitions to expand in new areas in order to create an "ecosystem for patient-centric, integrated care". Given limited opportunities for acute hospital mergers in Australia, Citi suspects the adjacent areas could include imaging and dialysis/chemotherapy.
Medicare data for pregnancy ultrasounds has indicated a rise in births in the first half of 2021. This will not offset the collapse in migration and Australia's population growth is still likely to slow, but Jarden believes there are some implications for private hospitals.
Management has indicated record maternity bookings in March and April and the broker suspects, with public hospitals experiencing capacity constraints and an increase in disposable income, a shift back to private hospitals for maternity use may result. Jarden estimates this segment represents around 7% of the company's Australian revenue is and is growing at around 5%.
Jarden, not one of the seven stockbrokers monitored daily on the FNArena's database, recently initiated on Ramsay Health Care with a Buy rating and $79.30 target. The broker notes the stock trades on a price/earnings ratio of 35.2x on FY21 estimates and 24.7x on FY22 estimates.
This is in line with historical multiples. Still, relative to the market the PE is close to its five-year lows. FNArena's database has two Buy ratings, four Hold and one Sell (Morgan Stanley). The consensus target is $69.35, signalling 2.7% upside to the last share price.
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