Price to Pay

Ramsay Health Care, along with most private hospital groups globally, is stepping up to play a front-line role in managing the COVID-19 crisis. This will necessarily involve a financial sacrifice as higher-value elective surgeries are postponed to free up capacity to cater for an influx of COVID-19 patients. With no shortage of patients likely and funding commitments from governments, we are confident the business will continue to generate a profit, albeit a smaller one.

 

We have reduced our earnings forecasts by 8% in FY20 and 12% in FY21, and lowered our revenue growth and margins forecasts across Ramsay’s global operations. This reflects the postponement of elective surgery and a lift in labour costs due to increased sick leave and higher agency costs. We anticipate much of the postponed work will start to return, boosting demand by late 2020. Given the unknown timeframe and the number of people affected, we acknowledge the high uncertainty of these forecasts.

 

A key concern in the private health sector is the structural headwind caused by affordability concerns. These pressures will likely grow with the dramatic disruption to the economy caused by the COVID-19 outbreak. Even in the event of a precipitous decline in health fund membership, however, the need for Ramsay’s hospitals will not diminish, highlighting the value of the group’s assets.

 

Looking beyond COVID-19, we see Ramsay’s hospital portfolio as an attractive asset given the rising health needs of ageing populations. We are not calling the bottom of the market given the pervasive uncertainty, but the current share price weakness presents an opportunity to build a position in the stock. We have upgraded our recommendation to Accumulate from Hold, while our target price has reduced to $63.00 from $74.00 due to the changes to our earnings forecasts. 

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