Is Ramsay Health Care (ASX: RHC) A Stock To Buy?

This article was originally published at MF & Co. Asset Management.

Ramsay group (ASX RHC) is one of the top 5 private hospital operators in the world. Ramsay Health Care operates 235 hospitals, day surgery centres, treatment facilities, rehabilitation and psychiatric units in Australia, France, UK, Italy, Indonesia and Malaysia.

In addition, Ramsay Health Care is one of the biggest private hospital operators in both France and Australia. In the past ten years, The Ramsay Health Care stock price has seen significant gains. However, Ramsay Healthcare shares have performed poorly recently.

Ramsay Healthcare Shares (ASX RHC) - XHJ

The S&P/ASX 200 Health Care (XHJ) is a sector benchmark that reflects healthcare companies included in the S&P/ASX 200. In the past three years, the healthcare sector has trended up strongly especially in the last year, with growth reaching 35.32%, outperforming the wider market.

Even though Ramsay Health Care shares were strongly correlated to the Health Care benchmark, RHC started to underperform in recent years.

Ramsay Healthcare Shares (ASX RHC) - HSO

Even though Ramsay Health Care shares underperformed the healthcare industry, Healthscope (HSO) did even worse by underperforming Ramsay. From an industry point of view, it seems that the private hospital sub-industry is just not as profitable as other health care sub-industries.

Ramsay Health Care Shares Underperform Against Health Care Industry

Compared to other healthcare stocks of similar size, apart from Healthscope, Ramsay health care shares is underperforming on revenue, net profit, profit margin and growth.

Revenue(million) Revenue Growth Net Profit Net Profit Growth Net Profit Margin
Ramsay Health Care (ASX RHC) 9,181 5.40% 388 -20.6% 4.22%
Sonic Healthcare (ASX SGL) 5,541 8.20% 476 11.0% 11.20%
ResMed (ASX RMD) 2,340 13.26% 316 -4.3% 13.50%
Healthscope (ASX HSO) 2340 3.70% 75.8 -49.9% 3.24%

Resmed leads the way in both revenue growth and profit margin. Healthscope and Ramsay are both private hospital service providers with similar revenue growth and negative growth in net profit, especially for Healthscope.

Even though revenue has grown, profits have fallen, indicating issues around rising costs for this industry. Additionally, the net profit margin for the two private hospital operators is also very low compared to Sonic and Resmed, indicating a low profit margin industry. This explains the dramatic fall in net profit as a low profit margin susceptible to external shocks.

Overall, the private healthcare sub-industry is not looking too healthy at the moment.

P/E (TTM) Diluted EPS (cent) Diluted EPS Growth ROE
Ramsay Health Care 29.41 185.6 -21.0% 15.86%
Sonic Healthcare 22.98 112 9.9% 11.11%
ResMed 51.82 219 -8.75% 15.34%
Healthscope 41.35 4.3 -50.00% 3.23%

ResMed has the lowest P/E ratio which is much lower than other three companies, but Ramsay has a 15.86% return on equity which is the highest of the four companies. The two private hospital companies are experiencing negative diluted EPS growth indicating issues with the industry. Ramsay has a relatively high PE ratio of 29x, but still much lower than Healthscope.

Sonic Healthcare looks to be in a better position in terms of growth in revenue, net profit and a stronger profit margin. Unless there is a specific reason to invest in private hospitals, it looks like alternative sub-industries are more attractive at this time.

Ramsay Health Care Global Revenue

($=AUD £=GBP €=EUR)

Revenue (million) Revenue Growth EBITDA (million) EBITDA Growth
Group $9,176.20 5.40% $1395.93 6.20%
Australia/Asia $4,980.00 5.46% $756.67 12.10%
UK £424.20 -5.20% £102.7 -9.8%
France  €2200.00 0.3% €445.7 -0.6%

Ramsay Health Care shares have seen stable growth in revenue and EBIT in the past few years of around 5-6%. Group revenue increased by 5.4% to $9.2 billion and group earnings before interest, tax, depreciation and amortization (EBITDA) increased by 6.2% to $1.4 billion.

A large percentage of revenue comes from Australia and the Asian Market. In the French market, Ramsay Health Care shares have a positive revenue growth with a negative EBITDA growth. Ramsay has indicated that Ramsay Generale De Sante performed in line with expectations considering the negative tariff environment.

Compared with the French market, the situation in UK subsidiary has performed much worse. The fall in EBIT of 9.8% is much worse than the fall in revenue of 5.20%. This could be because of changes in the NHS. Thanks to demand management strategies, the volume of NHS suffered a “significant downturn”.

Although Ramsay did not do so well in the European market, they still performed well in the Australian market. In the Australian and Asian market, Ramsay achieved a 5.46% rise in Revenue and a 12.1% increase in EBITDA, something that is generally hard to achieve for a large company. In addition, a 12.1% rise in EBITDA is still amazing for a private hospital company despite challenging industry conditions.

Ramsay Health Care Continues To Expand

Ramsay Health Care has been investing in expanding current hospitals and building new ones, which should mean more growth for Ramsay over time. It is planning to grow into other areas like North America or China. It is also starting a large joint venture chain to save on costs.

Ramsay approved $325 million of brownfield projects in FY18. This will result in an additional 229 net beds, 24 operating theatres and 39 consulting suites. In FY19 Ramsay expects to complete $242 million worth of work adding 216 net beds, 30 consulting suites, 15 operating theatres and one emergency department.

According to the Australian Institute of Health and Welfare, around 15% of Australians (3.7 million) are aged 65 and over in 2016. This is expected to grow to 22% (8.7 million) by 2056. A growing elderly population should be good news for Ramsay over time.

We go into more detail about the aging baby boomer population and how it will affect the healthcare industry in a positive way in our article about why Volpara Health Technologies is a stock to buy.

French Tariff Cut A Threat To Ramsay

The French government announced the tariff it paid for private hospitals would cut by an average of 2.15%, following on from a 2.5 per cent cut in 2015. In Australia, private hospitals get most of their income from private hospital insurance companies, such as Bupa and Medibank Private. However, in France, most of the health care is covered by the government.

Due to the profit declined in recent years, Ramsay French subsidiary launched an unsolicited takeover bid for Capio AB. However, Capio rejected Ramsay’s cash offer of 48.5 kronor per share, saying it did not reflect the value of the company. To sweeten the deal, Ramsay upped the offer to 53.6 kronor per share. If Capio accepts the offer from Ramsay, the Ramsay Health Care share price should see some short-term pressure due to the cost of the acquisition, but it should grow revenue in the medium to long-term.

More Australian Patients Opting For Public Hospitals

Australian private hospitals are feeling the pinch as more patients opt for the public system and demand lower prices from private health insurance companies. Private health insurance companies like NIB Holdings (ASX NHF) and Medibank Private (ASX MPL) have been increasing premiums at a faster rate than inflation or wage growth. That could only go on for so long before it became unaffordable for many of Australia’s younger policyholders. The fewer people there are in the private insurance system the worse it becomes for private hospital operators like Ramsay.

A Relatively Strong Company in a Weak Industry

As a private hospital operator in Australia, Ramsay is profitable and is well positioned to take advantage of an ageing population. However, Ramsay is already the largest private hospital operator in Australia, and they are facing challenges expanding into the European market. At this moment, the challenge faced by the French government and the difference between private hospital insurance in the UK should be two main issue that Ramsay needs to deal with.

Ramsay Health Care shares can be considered a good defensive stock in Australia but don’t expect much growth from a company operating in a low margin, mature and declining industry.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.

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