Stock: Ramsay Health Care Limited
Stock code: RHC
Share Price: $17.98 (as at 4pm 13/05/11)
Broker Buy Recommendations:
Austock (8th May 2011, share price was $17.85 that day)
Investor Centre: Ramsay Health Care
Chart: Share price over the year to 13/05/2011
Recent market action is teaching commodity investors what the meaning of a crowded trade is. As investors have enjoyed the run up in prices over the course of the last 12 months in commodities, steep plunges in silver and other commodities show the real danger of everyone simultaneuously running for the exit. In times like these, no one want a portfolio filled with junior miners and many investors rotate into defensive sectors such as healthcare. Ramsay Health Care is one such company that is positioned to benefit due to positive demographics of an aging population in Australia. People will continue to need healthcare regardless the price of gold or oil.
Founded in 1964 by Paul Ramsay, Ramsay Health Care Limited began with the purchase of the Warina House in Sydney and its conversion into a 16 bed psychiatric hospital facility. From these humble ‘One Flew Over The Cuckoo’s Nest’ roots, RHC transformed itself into Australia’s largest private hospital operator with approximately 30% market share and has become a global hospital group with operations in Australia, the UK, France and Indonesia via several acquisitions. RHC now employs more than 30,000 people across three continents.
Ramsay Health Care’s reach is broad, it operates more than 116 hospitals and day surgery facilities across Australia, the UK, France and Indonesia. RHC has over 7,000 beds in Australia, 850 beds in the UK, 1,000 beds in France and total of over 600 beds in several Indonesian hospitals. RHC services a wide range of health care needs from day surgery procedures to highly complex surgery, as well as psychiatric care and rehabilitation.
In February, Ramsay Health Care announced its half-year results. Net profit increased 30.8 per cent with RHC reporting profits of $102.8 million for the six months to December 31, 2010, rising from $78.6 million in the previous corresponding period. Revenue rose 10.7 per cent to $1.9 billion for the latest six month period.
Business in the Australia / Indonesia region reported revenue growth of 8.7%, slighter better than expected, with growth driven by admissions growth and pricing. RHC also reported that margin improvement was a result of organic growth and a continued focus on costs. Demand is expected to continue due to positive demographics (aging population) and a stable operating environment. The private hospital sector is also an integral part of the Australian health care system given it treats more than 40% of all patients who go to hospital, and receives bipartisan political support for strong private sector that is expected to continue. Regulatory risk remains in Australia as the means testing the Private Health Insurance rebate issue continues.
Ramsay Health Care’s UK business did not perform as well in the first half of the year H11 due to difficult business conditions. Management reported static revenue growth in the region but EBIT increased by 17% primarily due to accounting changes where depreciation was lower due to a change in the useful life of software assets and move to leasing ISTCs versus previous ownership arrangements. Economic conditions remain challenging in the UK, as a major reorganisation of the UK’s NHS is currently underway. Management expects short term challenges to remain but sees that in the medium to long term demand will grow driven by positive demographics.
Business in France was also below management’s expectations in terms of revenue and EBITDA, however management noted that the regulatory environment in France is stable for the time being and that the business is on target. Positive demographics in France are also expected to drive future demand and management believes that there will be more opportunities for acquisitions as consolidation is expected in the highly fragmented French healthcare market.
For FY 2011 RHC reaffirmed its guidance for group core NPAT growth of 22%-24% which translates to core EPS growth of 18%-20%.
Image text: Technical traders may see that RHC is testing current down trendline on the daily chart. Bulls need to watch for a pick up in momentum for confirmation on break of trend lines. Bears and bulls need to note bearish M pattern that has formed on daily chart. Break below $17.00 will confirm pattern and could validate a short-term bearish thesis.
Technical traders may see that RHC is currently bouncing higher and testing the down trend line on the daily chart as the market adjusts its view to the fiscal budget news. Prices have been trading lower over the course of the last month. In the more intermediate term, RHC has been stuck trading sideways range over the past 6 months, trading primarily between the $17.00 and $19.00 dollar range. RHC bulls should take note of the potential bearish M pattern that is forming on the daily chart. The pattern is suggesting that prices could hug lower Bollinger band lower and test $17.00, which is the floor of the sideways trading range. RHC bears are encouraged by weakening momentum that is highlighted by the downward trend line on the stochastic indicator. RHC bears may wish to see if current down trend lines hold on the daily chart and stochastic indicator before taking positions. RHC bulls may wish to watch the price action around the $17.00 mark and the monitor if momentum picks up on a break of the downward trend lines. Overall chart appears to be currently supportive of a short term move lower based on current momentum and bearish price patterns. Bulls may want to see a close above current down trend lines to invalidate the short term bearish story.
Michael Heffernan of Austock, who has a buy recommendation on Ramsay Health Care, following the 30.8 per cent increase in net profit after tax to $102.8 million for the six months to December 31, 2010 commented that RHC “should continue doing well in light of the immense pressure on the public hospital system and an ageing population. Its share market fundamentals are attractive.”
According to Reuters data there are currently 3 analysts with buy recommendations, 2 with outperform ratings, 11 hold ratings, 0 underperform and only 1 sell recommendation. This is unchanged from 2 months ago.
Overall, the state of the Australian private hospital industry appears robust. With private health membership growing and positive demographics – let’s face it, the boomers aren’t getting any younger – RHC expects demand growth and margin expansion to continue in Australia. The main risks to RHC are its exposure to any regulatory changes such as the PHI rebate debate in Australia and the OFT investigation of the private hospital sector in the UK. The price action on the daily chart of RHC suggests that the market is currently pondering the impact of possible future regulations. Anyone who has invested over the long term understands that market participants have a tendency of being myopic and miss the big picture.
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