Ramsay Health Care: Well placed, but needs time to make a full recovery
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 25 February 2022, 11:30 AM
- Sectors Covered:
- 1H results were ahead of market, albeit behind our estimates, and were materially impacted by COVID and higher costs, sending overall profit and OCF backwards.
- Further COVID waves resulting in isolation orders, lockdowns, surgical restrictions, and cancellations varied across geographies, pulling APAC and UK down, while EU was up modestly on supportive government funding and acquisitions.
- While Ramsay Health Care (ASX:RHC) stands poised to address pent up demand as COVID restrictions ease, the global COVID response and doctor/patient behavior dictates the recovery trajectory, with work force issues and higher costs adding additional headwinds.
- We have adjusted our FY22-24 earnings forecasts, with our DCF/SOTP target price increasing to (login to view). Hold.
1H result beat market expectations, but missed our estimates, with NPAT A$159m (-30%; Consensus A$150m; Morgans A$203m) on revenue of A$6,688m (+1.2%; Consensus A$6,604m; Morgans A$6,729m).
EBIT fell 8.3% to A$489m and margins contracted (150bp, 7.3%), despite A$207m in government payments helping to offset COVID-related costs and restrictions.
OCF fell 83% to A$179m, on lower earnings and wide Working Capital changes on return of government grants, with the dividend flat (48.5c).
In Australia, COVID disruptions shaved A$107m off profit, coupled with higher personnel and supply costs, saw EBITDAR flat (A$406m; includes A$19m provision release) and revenue stagnant (A$2,731m), on unfavorable mix (surgical -2.1%; medical +6%) despite admissions up 2.1% (2.4% on 1HFY20).
In Jan-22, COVID hit Australian profit by A$48m. While this level is not expected through 2H, as surgical restrictions ease, profitability is expected to be materially impacted by doctor/patient reluctance to enter hospitals and staffing availability.
In UK, COVID “severely” impacted the business (GBP3m/month), with material procedure cancellations, significantly higher personnel costs, and no government payments, resulting in underlying profit falling 120% (-A$11m; ex A$25m in NRIs) despite revenue up c7% (A$513m) on 13% admission growth (cycling weak pcp).
RHC entered into a new volume-based agreement with NHS (10-Jan-22 to 31-Mar-22), which should reduce volatility, but activity levels remain COVID dependent, with management focused on trying to mitigate the impact of cancellations, managing staffing costs and is working with the UK government to address the expanding public wait list for elective surgery and non-surgical services.
Across EU, government assistance programs (A$203m) and improving admissions in the Nordics, helped to drive revenue (+3.7%; A$3,225m), while underlying profit was up modestly (3.3%;A$239m), supported via government funding (A$203m) and acquisitions.
While the French Government is expected to provide a new revenue decree (1 Jan-22 to 30 Jun-22), details have yet to be released, with profitability still determined by COVID as well as staffing levels, which has been heavily impacted by absenteeism and pandemic fatigue.
Forecast and valuation update
FY22-24 underlying earnings adjust -3.4%/+1.9%/+4.2%, respectively.
Our (login to view) price target is based on blended DCF, PE and EV/EBITDA valuation.
While pent up demand and renewed government programs are supportive, the operating environment remains unpredictable and dynamic, with COVID, doctor/patient behavior, costs and workforce issues defining the earnings profile.
FY22 results 26-Aug-22.
PHI vagaries; COVID impacts: stronger/ weaker volumes; margin compression/expansions; regulatory changes; faster/slower Capio integration.
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