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Ramsay Stakes Future on Mental Health

Australia | Dec 20 2021


Its latest acquisition has increased Ramsay Health Care’s exposure to the high growth mental health care segment, but potential opportunity has largely failed to impress analysts.

-Ramsay Health has acquired UK-based Elysium Healthcare for $1.4bn
-The purchase gives the company a solid foothold in mental health care in a key region
-High growth opportunity does little to offset operational weakness and high costs

By Danielle Austin

With the $1.4bn debt-funded acquisition of UK’s Elysium Healthcare, Ramsay Health Care ((RHC)) further diversifies into the high growth mental health segment. The purchase makes Ramsay one of the largest mental health care providers in each of its key regions, and should not only provide an earnings benefit but also offer a leverage point for Ramsay to accelerate growth in the UK.

Operating 72 sites and around 2,000 beds to offer long term mental health, complex care and neurology services, Elysium Healthcare has demonstrated strong growth in recent years including an 18.6% revenue compound annual growth rate between 2018-2020. The pandemic appears to have had little impact on Elysium’s performance, with the company’s revenue growth above market and capacity increasing 9.5% in the last year.

The mental health care segment has demonstrated steeper growth acceleration than any other area of health care, in the UK growing at a rate of 4% per annum.

Missing the mark despite high growth

While the purchase increases Ramsay’s foothold in a high growth segment, the transaction has largely failed to excite analysts and does little to offset weakness elsewhere.

Brokers noted the near-term earnings benefit expected from the purchase will be largely offset by covid impacts and local labour constraints. The purchase also does little to overcome concern around continuing high costs and a potential lack of recovery in in-hospital care following the pandemic.

While Ramsay Health Care has guided to the purchase being mid-single digit accretive to earnings per share in FY23, forecasts from brokers following the news of the acquisition are largely below this.

Jarden has increased its price target to $88.00 from $84.00 following the acquisition and retains a Buy rating. While Jarden estimates a 4.5% and 5.3% earnings per share benefit in FY23 and FY24 from the purchase, impact of operational weakness drove a final forecast update of 2.6% and 6.7%.

A majority of brokers have set target prices between $72.50 and $76.00. Within this mid-range group is Ord Minnett, which retained an Accumulate rating and increased its target price to $75.00 from $74.00. Analysts noted that while their modelling saw the Elysium Healthcare purchase drive a 4% earnings per share benefit in FY23, delayed covid recovery in the UK and France and increased labour costs will be an estimated -8% drag on FY22. Taking all factors into consideration the broker increased FY23 earnings per share forecasts just 0.6%.

Morgan Stanley, despite raising its target price to $65.00 from $60.00, retains the lowest valuation on Ramsay in the FNArena database and an Underweight rating. While the broker acknowledged the acquisition was likely to have a positive impact on medium-term results it looks to further confidence in post-pandemic margin durability as costs remain high and insurers pay lower indexation for a longer term outlook. Rounding out the lower end of recommendations, both Morgans and Wilsons also hold target prices under $70.00.

The FNArena broker database shows two Buy, three hold and one Sell or equivalent ratings with a consensus target of $71.52.

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