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Treasure Chest: Ramsay Health Care

Treasure Chest | Oct 26 2023


FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is on Ramsay Health Care.

Whose Idea Is It?

RBC Capital Markets

The subject:

Private hospital operator Ramsay Health Care ((RHC))

More info:

Ramsay Health Care was hard hit in the pandemic as elective surgery was banned in favour of treating covid patients. It has subsequently suffered from labour supply constraints and rising costs, and is swimming in debt, which has shareholders concerned.

In order to address that debt, Ramsay is in the process of attempting to sell its joint venture with Malaysia’s Sime Darby, which it hopes to complete in this quarter or the next.

RBC Capital Markets’ analysis of Asian hospitals peers reveals the sector is currently trading on forward enterprise value multiples of 10x-14x but shares have historically traded at multiples of 15x-21x over the long run.

Factoring in a takeover premium, RBC believes Ramsay Sime Darby could be sold at an enterprise multiple of 14x-16x which would reduce the wholly owned funding group's leverage and be 1-2% earnings per share accretive in FY24-26.

Some investors have been lobbying the Ramsay board to restructure the company to boost its share price. RBC’s analysis supports a separation of the Ramsay Sante business. Ramsay Sante operates 443 hospitals, clinics, primary care and imaging centres across France, Sweden, Norway, Denmark and Italy.

RBC’s sum-of-the-parts valuation of $58.50 per share for Ramsay Health Care includes $17.00 for Ramsay Sante. Additional value could be created if the Ramsay Sante stake was sold to another party and a premium for control was paid.

RBC also believes investors could ascribe a greater value to the standalone Ramsay business, ex of Ramsay Sante, given it would have higher margins, lower debt levels and a higher return on invested capital.

In general, RBC believes conditions have started to improve for Ramsay and earnings growth will resume from FY24. RBC sees potential for shareholder value to be created through the sale of the Ramsay Sime Darby JV and separation of the Ramsay Sante business.

The analysts have revised forecasts for improved market conditions and have assumed the Ramsay Sime Darby sale completes, with Ramsay Sante not in the frame as yet. RBC has upgraded its recommendation to Outperform from Sector-Perform and lifted its target to $67.00 from $57.00.

Morgan Stanley recently raised its earnings margin assumptions for Ramsay’s French and Australian operations, which increased this broker's target to $53.60 from $49.60. Margins should improve due to reduced labour supply constraints and benefits derived from cost-saving initiatives, Morgan Stanley believes. Equal-weight rating retained, with an In-Line sector view.

An analysis of data for areas across Ramsay Health Care’s Australian hospital portfolio highlights key characteristics which Macquarie sees as favourable for private hospital volumes. This includes a higher proportion of the population aged 55 and over relative to the national average as well as higher private health insurance participation.

While noting the inherent value of Australian assets, this broker sees the apparent value as only likely to be realised as part of a change of control transaction (ie, selling the JV). Based on the current structure, this broker sees valuation as fair. Macquarie has a Neutral rating and $52.50 target.

FNArena's consensus price target of $58.20 suggests the shares are some -18.60% undervalued. Four of the five major brokers covering the company hold a Neutral/Hold rating, with only Morgans on Buy (with a $66 price target).

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