Date : 09/10/2020

Ramsay Health Care

ASX :

RHC

Market Cap : $15.48 Billion

Dividend Per Share : $0.625

Dividend Yield : 2.22 %

Buy

52 Week Range : $46.12 - $80.93

Share Price : $68.94

A firm that has managed the Covid19 crisis well, has increased its financial flexibility, and is looking to invest for growth in the coming years. We recommend to "Buy".

Company Analysis

 

Ramsay Health Care (ASX: RHC) is a Sydney based health care company with a global footprint. Ramsay operates over 480 facilities that span across 11 countries in Asia Pacific, and Europe. They offer services such as surgery, mental health, and rehabilitation in addition to primary healthcare services. Ramsay is Australia’s largest private hospital chain with 72 hospitals. In addition to hospitals, the firm also operates pharmacies in Australia.

Over 75% of RHC’s revenues are generated from APAC and France. Nordic countries and the UK account for just 15% and 7.5%, respectively.

Since the Covid19 outbreak, Ramsay Health Care has served on the frontlines by setting up Covid19 response efforts by working with governments. RHC assisted local hospitals by supplying beds and ventilators to better manage the crisis.

Covid19 brought about a pause to non-essential surgeries all over the world. This impacted the revenues of RHC. The firm, however, has been aggressive in pushing for virtual consultations to better manage the situation. The bounce back has started though, with surgeries in Europe surging again since June. However, uncertainties will remain as long as the pandemic persists.

Company Updates

RHC has increased its financial flexibility in 2020 by raising equity. $1.2 billion was raised by the way of a fully underwritten institutional placement offering at a share price of $56.0.

The firm also announced a share purchase plan to eligible Ramsay shareholders in Australia and NZ. This, however, was not underwritten. The firm raised $300m at the same price of $56.0 a share.

There has been a dip in performance relative to previous year growth rates, however, Ramsay has not suffered from a negative overall performance in FY2020. The firm also has undrawn debt facilities available should it need more capital during the pandemic or any other unforeseen event.


Source: Tradingview.com

Ramsay share price has not recovered to the highs it was trading at prior to the pandemic. The stock has been volatile in recent months due to investor fears regarding the global pandemic situation. The fact that Ramsay has been working with governments to help them manage Covid19 adds to the risk that investors see in the stock and hence, has reflected on the share price.

Private insurance covers in Australia have dropped in recent times as the younger generations are staying away from it. This has resulted in fears over Ramsay’s Australia performance as it is the largest private hospital chain in the country. However, Ramsay is betting big on its brownfield program to take advantage of the ageing population in Australia. The picture below shows the investment that has gone into the program and the forecast for the following year for brownfield.


Source: Ramsay Health Care

Industry Analysis

The healthcare industry is one of the most essential to any country. Failure to contain the virus outbreak due to inefficiencies within the system is present not just in developing countries, but in the developed nations as well.

The healthcare industry is estimated to benefit from large budgets being allocated once economies recover from the pandemic. Until then however, the industry has been plagued by high costs and low revenues due to a pause in services.

Telemedicine has seen a boom due to pandemic restriction. This will significantly reduce operating costs for healthcare providers if firms make a shift in its business model to deliver such services.

Specialist medical services industry in Australia is forecasted to grow by about 3%, while the mental health industry will be driven by growth in Europe

Ramsay Health Care looks to have already made that shift in parts of Europe. The aging population in Australia is bound to help the industry and firm see some growth in an otherwise very stable environment.

Investment Thesis

Revenues for the firm posted for FY2020 was just over $12 billion – a 5.3% growth from FY2019. The growth was hindered as the firm suffered decreases in revenues in Australia by 2.2%, the UK by 5%. Europe resulted in a 14.3% increase from the previous year as surgical activity returned in June. The firm has always maintained stable EBITDA margins; however, we see a dip in FY2020 due to the increased operating expenses.

Depreciation and amortisation costs almost doubled during the year and has hindered the net income – a 48% decline from the previous year. Interest expenses have added to the decrease in profits for the year as well with a 2.4x increase.

The cash in the balance sheet of RHC is $1.5 billion. The short-term financial health is a cause of concern as the firm holds $9 billion of debt as of FY2020. The uncertain climate the firm is operating in due to the pandemic, does raise concerns in the short-term. The long-term financial health on the other hand is slightly more comforting as total assets exceed total liabilities by 1.3x. The firm also does not have any debt facilities that mature until the end of 2022.

The capital structure is made up of 69.3% debt and just 25.4% equity at the end of FY2020. RHC’s recent equity raises do bring back some financial flexibility for the future.

The firm has laid out a clear strategy to drive growth in the coming years by increasing the private/public collaboration, introducing new models for services, and by mergers and acquisitions.

The most recent dividend paid out by the firm was 62.5 cents per share at an annual yield of 2.22%.

Recommendation

Ramsay’s recent performance may have been a dip; however, it has stood up well to the pandemic situation. The firm’s strategy strives for growth in the future, and the recent equity raise is a good indicator of improving financial flexibility. With growth and dividend coming the way of investors, we issue a “Buy” recommendation with a long-term outlook.

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