No Straight Covid-Relief For Ramsay Health Care

Australia | Nov 15 2022

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

Following first quarter results, some brokers anticipate rising margins for Ramsay Health Care though overseas operations are harder to forecast.

-First quarter revenues for Ramsay Health Care rise, profits decline
-Brokers upbeat on an Australian recovery, offshore concerns persist
-Management notes improvement across all geographies
-Goldman Sachs feels margins have bottomed
-Average target price falls

By Mark Woodruff

The share price of private hospital operator Ramsay Health Care ((RHC)) has been on a rollercaster ride in 2022, hitting a high of $84.58 in mid-April and plumbing to a $55.73 low just last month.

In the wake of last week’s first quarter results, the share price received a minor fillip after some brokers became more optimistic about the domestic business, though concerns remain for the European operations.

The company operates hospitals and day surgery centres, along with treatment facilities, rehabilitation and psychiatric units and a nursing college across Australia, the UK, France, Indonesia, Malaysia and Italy.

The Australian business contributes around 41% of revenue, while Continental Europe and the UK account for circa 52% and 7%, respectively.

Management noted improvement across all geographies as covid cases decline, with the company well positioned for volume growth over the medium-to-long term.

Revenues increased by 6.7% year-on-year to $3.5bn, while underlying earnings (EBIT) fell by -13% to $172m.

Goldman Sachs believes a recovery is finally on the way with covid-related disruptions and costs appearing to abate and believes the -113bps fall in margin to 5% will represent a nadir. Any margin improvement from here is expected to reintroduce some earnings leverage back into the business.

Profit of $57.4m marked a substantial miss versus the consensus expectation for $210m, largely due to earnings in Europe of $17.7m compared to the $229m forecast. Credit Suisse attributes the miss to lower covid-related cost support, high inflation and staff shortage challenges.

Morgans notes activity is gradually improving and there is an ever-increasing surgical backlog, which should add uplift to forecasts. This greater activity and lower costs are thought to indicate improving momentum. Covid costs are down to less than -$6m in October from -$39m in July.

However, Morgans also points out costs associated with covid, staff shortages, cancellations, and other inflationary pressures are expected to prevent margins returning to pre-covid levels over the near-to-medium term.

Citi agrees with Goldman Sachs the post-covid recovery is underway in Australia, based upon a pick-up in activity during September and October. Surgical admissions per workday rose by more than 10% compared to FY20, while non-surgical increased by 4%.

According to this broker, a recovery in higher-margin non-surgical admissions should result in margin expansion over time.

Staff absenteeism and turnover declined materially in Australia in the first quarter from peaks seen earlier in the year, points out Morgan Stanley. Management also noted supportive rates from the health funds and believes workforce shortages will abate in 2023.

The activity level also continues to improve in the UK, though Citi believes the recovery may be slowed by a rise in covid and flu cases. Profits were severely impacted by the labour shortage, which are expected to improve over time.

Citi analyst finds it difficult to draw any conclusions on France from first quarter results, though suspect any margin recovery will take longer given greater dependence on government funding.

Movements in ratings and average target price

Ord Minnett leaves its forecasts largely unchanged though upgrades its rating to Buy from Accumulate on potential upside from a domestic recovery.

While Wilsons acknowledges a first quarter earnings miss, exit run-rates for volumes and mix were supportive of revenue forecasts and the broker’s rating rises to Overweight from Market Weight. The diminishing impact of covid-related costs were also mentioned.

On the flipside, Citi downgrades to Neutral from Buy due to not only lower EPS forecasts but also after factoring-in less near-term likelihood for a large-scale sale and leaseback transaction. This view comes as management dismissed recent press reports about a potential divestment of Ramsay Sante in France. The broker's target price was also lowered to $62 from $73.

Goldman Sachs highlights first quarter earnings for Sante fell by -73% year-on-year, which underlines the distortive impact of previously higher government support measures during covid.

There are six covering brokers in the FNArena database with three Buy (or equivalent) ratings, two Neutral and one Underweight rating.

Following first quarter results, the average target price has fallen to $67.16, down from $68.97, suggesting 9.2% upside to the latest share price.

Outside of the database, the average target price of the Overweight-rated Jarden and Wilsons, along with Goldman Sachs (Neutral), falls to $64.16 from $65.69.

Outlook

Neutral-rated Credit Suisse believes the company has limited deleveraging options outside of improved earnings performance, which may restrict the execution of its brownfield investments. It’s felt any significant sale and leaseback is unlikely in the current macro environment.

Ord Minnett points out the company negotiated a lift in its allowable leverage ratio during the quarter, and this broker is comfortable with current debt levels, given operating conditions are on the improve.

This view holds, even if further covid headwinds emerge. The Australian media is reporting a ‘fourth wave’ with covid cases rising sharply in most states. While this is a threat, Ord Minnett remains confident Ramsay Health Care and the community will increasingly learn to manage through this new normal.

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