Charlie Aitken

Ramsay's result showed that private hospital operators continue to work in a challenging environment where top-line growth is moderating significantly whilst cost pressures continue to mount. Sales growth in RHC’s Australian operations moderated to 4.3% year-on-year, whilst the French and UK operations went backwards. At the same time the quality of RHC’s earnings have deteriorated sharply on a number of measure.

Risks rising amidst challenging conditions

Our view remains that RHC is in the midst of an ongoing PE de-rating reflecting the more challenging operating conditions both domestically and abroad. Additionally, we feel that there is continued risk to the levels of returns that the company has been able to generate from their Australian asset base. These returns increase the regulatory risk facing the sector as private health coverage comes under scrutiny.

Cashflows diverging from reported profits

Earnings quality has been steadily deteriorating at RHC over recent reporting seasons and this trend continued today. Whilst company highlights growth in “normalised” earnings, it is relying increasingly heavily on taking costs below the line to meet expectations. “Non-core” expenses grew to 17% of H1 statutory NPAT from 11% in FY17 and 7% in FY16.

By most metrics, a program that has implementation costs ~9x the targeted annual cost saving is marginal

The only major significant cost to be singled out today by RHC management is a restructuring charge taken at its French operations to centralise non-core functions. A pre-tax charge of €44m was taken (“below the line”) for a program which is targeted at producing €5m of annual (“above the line”) cost savings once the program is fully implemented in 3 years. By most metrics a program that has implementation costs ~9x the targeted annual cost saving is marginal. However, it does serve to help preserve “normalised earnings”.

Operating cash flows also show a diverging trend from reported profit growth. Gross cash receipts for the business (cash from customers minus payments to suppliers and employees) went backwards in FY17 and again went backwards in 1H FY18.

Aitken Investment Management is a Global High Conviction Fund. For more information please visit our website.


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