NHS volumes remain subdued; funding uplift from 2HFY19
Ongoing NHS funding issues have driven private UK hospital industry volumes down to 1% (from 3-4% historically), prompting Ramsay Health Care (RHC) to take a A$125m impairment across six UK sites (i.e. Berkshire Independent, Ashtead, Mount Stuart, Croydon, Renacres and Clifton Park). This non-cash charge relates mainly to onerous lease provisions in FY19 and beyond, mainly in two hospitals (Berkshire Independent and Ashtead) and not to the fixed assets themselves.
Despite a recent positive tariff adjustment (from Apr-18) and growing patient waiting lists, management expects operating conditions to remain challenging in the medium term, as funding budgets are reset in Mar-19 and it is difficult to determine when we will see a normal pick-up in volumes.
Domestic business seeing low volumes and unfavourable case mix
RHC's Australian private hospitals have experienced weaker growth in medical procedural work and inpatient admissions, while Pharmacy rollouts have slowed, as more time is being spent on integration than on acquisitions. While public hospitals are not transferring ED patients at the same rate as seen historically, total volumes have not disappeared entirely, but are tracking to the low end of historical trends of around 3%.
Case mix also seems to be an issue, with growth skewed toward day/out-patients vs overnight/in-patients and to lower acuity procedures. In addition, management indicated that its visibility into theatre bookings is becoming less clear, flagging the lack of long waiting lists for new and young physicians.
Supply is willing and able...but when will demand return?
RHC has the largest and arguably the best private domestic hospital portfolio around. However, we see no quick supply side fix to what is mainly a demand-side issue. The million dollar question remains...when will volumes revert? Unfortunately, neither management nor we have an answer.
Our FY18-20 core NPAT estimates decline up to 3.8%, mainly on lower revenue and margin assumptions across the UK and Australia. While we continue to believe longer term core fundamentals remain sound and see value over this time horizon, the near term outlook remains opaque and likely to handicap outperformance despite attractive trading levels.
We retain our Hold recommendation with a revised share price target.
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