Private hospital operators have been under pressure recently. However, they received some positive news last week with the announcement of the Private Health Insurance (PHI) reforms. The proposed initiatives can be summed up in two broad categories, which are designed to; simplify understanding and reduce system costs.
While the logic should ultimately see the reforms stem falling PHI participation rates, being a positive for private health insurers and private hospital operators. Ramsay Health Care (RHC) remains a long way off its highs of September 2016, following the recent share price weakness, I believe RHC offers an attractive entry point into a quality healthcare operator.
RHC continues to deliver above-system growth rates in its Australian hospitals. I believe this is mainly due to expansion of brownfield operating theatres, higher quality mix of hospital locations and its expansion into the pharmacy channel.
The expansion of its retail pharmacy strategy aims to provide incremental earnings growth. RHC operates over 200 pharmacies, currently has 29 retail pharmacies and expects to have 60 plus by the end of financial year 2018 (FY18), as well as dispensaries within the hospitals. Given Australian pharmacies generate EBIT margins in the low-teens; this is likely to result in margin dilution for the Australian business margins.
RHC has set targets as part of its procurement cost synergies to achieve savings of $100m in FY18. This is expected to partially offset currency and operational headwinds in its United Kingdom (UK) and France operations. Margin pressure is mainly coming from higher nursing costs and increasing contribution from lower-margin NHS admissions in UK and tariff reductions in France. The balance sheet remains reasonable, supported by strong operating cash flow with high cash conversion rate. This enables RHC to continue to fund the pipeline of brownfield expansion and potential acquisitions.
It is not without risk, the obvious being negative government regulatory changes, however, I believe at current levels this is a solid long term growth thematic.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited, which is owned by National Australia Bank Limited.
