Ramsay Health Care Limited

Company Overview: Ramsay Health Care Limited (ASX: RHC) operates private hospitals in ~500 locations across Australia, U.K., France, Sweden, Norway, Denmark, Germany, Indonesia, Malaysia, Hong Kong and Italy. The company provides a range of healthcare services from day surgery procedures to complex surgery needs, as well as psychiatric care and rehabilitation. The company reports its financials under the four operating regions - Asia Pacific, UK, France and Nordics. The Asia Pacific region contributed the highest percentage of the revenue and other income of ~41% in FY20, followed by France at ~37% of total sales.

RHC Details

Resilient Top-Line Performance in FY20 Despite the Challenging Business Environment: Ramsay Health Care Limited (ASX: RHC) is a global hospital group, which owns and operates healthcare facilities. The market capitalisation of the company stood at ~$13.91 billion as on 11 January 2021. Recently, the company has entered into an agreement with NHS England, to provide services to NHS and its patients, given the rise in demand due to the outbreak of the COVID-19 pandemic. This agreement replaces the earlier agreement with NHS which was completed on 31 December 2020. The new agreement came into effect from 1 January 2021 and will expire on 31 March 2021.

The medium to long-term fundamentals of the healthcare sector remains optimistic. The presence of the company in key strategic markets positions it well to take advantage of improving industry business and volumes.

During FY20, the company reported a decent increase in revenue and other income of ~7% to $12,421.5 million from $11,596 million in FY19. However, there was a decrease in net profit to $309.2 million in FY20, from $572.4 million in FY19. This can be attributed to higher operating expenses during the period, combined with high finance costs.  The free cash flow of the company was decent during FY20, and together with the proceeds of $1.5 billion equity raising further strengthened the balance sheet. There was a notable increase in the cash position of the company to $1.50 billion in FY20, from $0.74 billion in FY19. The net debt of the group stood at $8.06 billion as on 30 June 2020. RHC paid a fully franked dividend of 62.5 cps during FY20.

FY20 Revenue Performance (Source: Company Reports)

Q1FY21 Trading Update: Despite the ongoing challenges of the COVID-19 pandemic, the company reported an increase of 1.5% in total revenue (ex. Victoria), compared to pcp. Its surgical admissions in Australia were up by 1.7%, during the same period. The company witnessed the restrictions on elective surgery ease in Victoria by the end of September 2020. The company’s Australia division operated on 85% of unrestricted capacity, as on 26 October 2020. Ramsay Sante witnessed an increase in surgical activity in Q1FY21. The Nordic region also reported a growth in surgical volumes in the past few months. The company has seen a moderate recovery in the UK, with revenue for Q1FY21 down by 9.9%, when compared to pcp. In Asia, volumes were impacted due to restrictions on movements of people, due to the outbreak of the COVID-19 pandemic.

Signing of Agreement with Medibank: The company has recently announced the signing of a three-year Hospital Purchaser Provider Agreement (HPPA) with Medibank. Under this agreement, RHC will provide treatment to Medibank customers under certain payment terms as mentioned in the agreement.

Business Strategy: The scale and size of RHC, enable it to focus on strong partnerships across its hospital chains, and generate earnings growth in the process. It plans to achieve this with the help of growing its business organically and continuous business improvement. During FY20, the management approved funding of ~$196 million for brownfield projects, which underpins the prospect of the sector in the long run. Ramsay Health Care Limited will look to further the provision of public hospital services through public/private collaborations. The company is looking to increase its market share and diversify its reach through strategic acquisitions and explore businesses in the adjacent verticals like pharmacy and patient transport.

Business Strategy (Source: Company Reports)

Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 31.15% of the total shareholding. Paul Ramsay Holdings Pty. Ltd is the largest shareholder in the company, with a percentage holding of 18.79%. BlackRock Institutional Trust Company, N.A. Ltd. holds the second maximum interest in the company at 2.62%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Improved Margin Performance: During FY20, the company delivered a decent gross margin of 75%, an increase from 74.6% in FY19. It also reported improved EBITDA margins of 15.1%. However, there was a decrease in net margin to 2.5% from 5%, during the same period. This can be attributed to higher interest costs and expenses. Thus, there was a corresponding drop in the ROE to 9%, owing to lower net income during FY20. Leverage was on the higher side with a debt/equity of 2.72x during the year. RHC maintained a healthy cash cycle of negative 32.6 days.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: The company operates in a sector that is exposed to a variety of risks. The COVID-19 pandemic has brought disruption in the business of the company and has impacted its financial performance, with the restricted movement of patients and deferring surgeries in some key markets. RHC operates in the Healthcare sector and as such is subject to strict laws and regulations. Ramsay derives a major part of its revenue from Government contracts, and therefore any adverse change in client concentration may impact the company's financial performance in the medium term. Moreover, any disruption or innovation in the sector presents the company with opportunities as well as risks to increase its market share.

What to Expect: FY20 has been a challenging year for the business environment due to the outbreak of the COVID-19 pandemic. The Healthcare sector was also impacted by the downturn in business activities; however, the long-term industry fundamentals remain decent. The pandemic has induced a backlog in RHC's key markets, and therefore the company expects increased surgery volumes and patient inflow going forward. With the gradual ease of restrictions across its key markets, RHC anticipates better operating leverage and improved earnings in the upcoming period.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation:  The company has delivered a decent top-line performance in FY20, despite the impact of the COVID-19 pandemic on its operations in key markets. It expects to report improved profitability going forward, with the ease of business restrictions across countries. RHC gave a negative return of 12.67% in the past three months and a negative return of 8.00% in the past one month. As per ASX, the stock of RHC is trading below its average 52-weeks’ levels of $46.120-$80.930, proffering a decent opportunity for the investors to enter the stock. On a technical analysis front, the stock of RHC has a support level of ~$58.785 and a resistance level of ~$65.052. We have valued the stock using a P/CF multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers such as Sonic Healthcare Limited (ASX: SHL), Healius Limited (ASX: HLS), to name a few, which comes under healthcare sector. Considering the current trading levels, resilient performance in a difficult period, positive prospects with ease of restrictions in key markets and a stable balance sheet to take advantage of new opportunities, we recommend a ‘Buy’ rating on the stock at the current market price of $60.20, down by 0.955% as on 11 January 2021.

RHC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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