Ramsay – a “blue chip” recovery stock
One of the better-performing sectors over the last few weeks has been healthcare. While often considered to be a ‘defensive’ sector that investors turn to in times of uncertainty, driving the performance has been strong earnings reports from sector leaders CSL and Cochlear. Another in that category is Australia’s leading operator of private hospitals, Ramsay Health Care (RHC).
Ramsay is of course much more than an Australian focussed business. Like others in the sector, more than half of its revenue now comes from offshore. Ramsay Santé, of which Ramsay owns just under 53%, is the second-largest private care provider in Europe, operating specialists’ clinics and primary care units in 350 locations in France, Denmark, Norway, Sweden and Italy. In the UK, Ramsay has a network of 34 acute hospitals and day procedure centres. It has recently acquired Elysium Healthcare, an operator of hospitals and complex care homes for individuals with mental health conditions.
In the December half-year, total revenue rose 1.2% to $6,687 million. EBIT of $489.2 million was down 16.2% on the corresponding period in FY21 and profit before tax was down 23.8% to $303.7 million. However, adjusting for a number of non-recurring items, profit before tax declined by 1.3%. Overall, these numbers were small “beats” on analyst consensus forecasts, with the dividend also higher than expected at 48.5 cents per share (fully franked).
Covid has severely impacted the operations of Ramsay, with mandated surgical restrictions, isolation orders on patients, employees and doctors, and higher costs for personal protective equipment and other pandemic-related measures. Staff vacancies and wage pressures are also impacting performance.
Despite the challenges of Covid and other market uncertainties, the Ramsay share price has remained remarkably steady. As the chart below shows, over the last 12 months, it has broadly traded in a range between $62.00 and $70.00.
Ramsay – last 12 months
Source: nabtrade
Over the last five years, Ramsay has traded in a range of $54.00 up to $80.00. At the height of the Covid meltdown in April 2020, it raised $1.4bn through a share placement and share purchase plan at $56.00 per share.
Ramsay – last 5 years
Source: nabtrade
What do the brokers say?
The brokers are moderately bullish on Ramsay. Of the major brokers, there are 2 ‘buy’ recommendations, 3 ‘neutral’ recommendations and 1 ‘sell’ recommendation. The consensus target price is $69.68 (range from a low of $62.00 to a high of $75.00), which is 8.3% higher than Friday’s closing price of $64.37. The table below shows recommendations and target prices.
All acknowledge that Ramsay is a “quality” company, “blue-chip” by any other definition. The pace of the recovery out of Covid, staff shortages and rising costs are seen as the key issues.
FNArena’s precis of Morgans: “As covid impacts ease, Ramsay is well placed, but it will take time to make a full recovery. Workforce issues and higher costs will add additional headwinds”. Citi says: “Costs are to remain higher than pre-covid and the return to ‘normal’ continues to be pushed further out. FY24 is the year to focus on when conditions are expected to return back to (more) normal”.
Goldman Sachs, who has a target price of $74.00, says: “Despite elevated uncertainty in the immediate term, Ramsay is seeing sequential improvements in all key geographies and, whilst further restrictions cannot be ruled out, the reduction/removal of isolation periods should be a key positive for this business. Beyond the near-term recovery, we see further margin upside from a further tapering of cash ‘covid costs’ and a steady improvement/normalization in sales mix.”
The brokers have Ramsay trading on a PE (price-earnings) multiple of 37.8 times forecast FY22 earnings and 25.0 times forecast FY23 earnings. The total dividend for FY22 is forecast at 124c (a yield of 1.9%), rising to 157c in FY23 (yield of 2.4%).
Bottom line
There is no doubt that portfolio investors should hold their Ramsay shares because post-Covid, earnings are set to recover. With something like 70% of costs being broadly fixed, Ramsay’s margin will improve as the backlog in surgical cases is addressed and the recovery in non-surgical admissions gains momentum.
What has been really interesting with Ramsay has been its incredibly steady share price, despite Covid and other market uncertainties, which I take to mean that it has a very loyal base of institutional shareholders. They haven’t seen any reason to sell – they are holders for the long term who think the price is going higher.
While there is ongoing political risk with Ramsay in regard to government intervention in the form of surgery restrictions or funding challenges (for example, the French Government has not yet disclosed the terms of a new revenue decree that will apply for the period from 1 Jan to 30 June 2022), I am inclined to follow the lead of the institutional investors. About $65; Ramsay is a long term buy.
Paul Rickard is co-founder of the Switzer Report. All prices and analysis at 28 February 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.