Positive Trends For Oz Private Hospital Players

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

For private hospital operators to deliver solid performance requires a strong private health insurance system. Southern Cross Equities was encouraged by the March quarter health insurance membership numbers released by the Private Health Insurance Administration Council.

The data showed the average age of Australians with private insurance was 39, which has not changed significantly since 2001. This is young enough to allow the funds to cover the burden of the average patient, who is aged 59. What it also means is with the Australian population ageing by two years at the median over the past eight years, the average age of new private health insurance members has fallen. Southern Cross Equities estimates the average age has come down from around 55 years old in 2005 to around 43 now.

This suggests the health funds are doing a good job in not only attracting new younger, healthier members but retaining them longer-term, helped here by the progressively higher premiums for those joining such funds after the age of 30. At the same time, the funds continue to attract older members as well, the broker suggesting this fact highlights strong underlying demand for such products.

In terms of the private hospital players Ramsay Health Care ((RHC)) and Healthscope ((HSP)), Southern Cross sees this trend as supportive of solid earnings growth in coming years, as on its numbers the former is expected to deliver earnings per share (EPS) of 68.1c, 77.2c and 90.1c for the period FY09-FY11 and the latter 34.9c, 40c and 44.3c for the same period.

By way of comparison, the FNArena database shows consensus EPS estimates for Ramsay of 68.5c this year and 79c in FY10, while for Healthscope the consensus numbers are 33.3c and 38.4c respectively.

The solid earnings growth outlooks make both stocks a Buy according to Southern Cross  with respective price targets of $12.30 for Ramsay and $5.00 for Healthscope. This compares to average price targets according to the FNArena database of $11.22 for Ramsay and $4.93 for Healthscope.

In terms of rating the database shows Ramsay is rated as Buy four times and Hold and Sell twice each, while Healthscope scores four Buy ratings, one Accumulate, two Holds and one Underperform recommendation.

The Underperform rating on Healthscope comes courtesy of Bank of America-Merrill Lynch, the broker continuing to see the risk of a decline in numbers of those with private health insurance, which would see increased pricing pressures in the sector.

The other issue the broker sees is if the company chooses to expand in the medical centre sphere at a rate beyond its historical acquisition rate it is likely to need to find additional funding sources given recently announced Budget changes to the diagnostics business could potentially see something of a “land grab” for GPs given they are the largest source of pathology referrals.

The broker suggests Primary Health Care ((PRY)) would be in the same boat in terms of needing to find additional funding sources if such a grab for GPs occurs, while Sonic Health ((SHL)) appears far better placed given it raised around $400 million last November.

In trading today shares in Ramsay Health are slightly stronger and as at 10.35am the stock was up 7c at $10.09, while Healthscope shares are slightly weaker trading down 3c at $3.99.

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