Solid results from Ramsay

Morgans Financial Limited

Ramsay Health Care has a stable core business underpinned by unwavering fundamentals and opportunities for growth. We retain our Add recommendation with an upgraded share price target.

Key points

The 1H underlying results for Ramsay Health Care (RHC) were solid and in line, underpinned by broad divisional performance and expanding group margins.

Despite industry volatility, domestic admission growth remains solid and is tracking to the long-term average (c5%).

CEO Christopher Rex surprised the market by announcing his retirement this year, but we are confident that RHC will remain on track.

Earnings growth across all divisions

1H16 results were solid and broadly in line, with core NPAT up 12.8% to A$267.8m (Morgans est. was A$266m) on product revenue of A$4,319m (+3.5%). Underlying EBITDAR was strong, increasing 5.4% to A$841.1m, with margins expanding 36bp to 19.5%. All core divisions contributed to earnings growth, but Australia/Asia stood out for underlying margin uplift, mainly on procurement benefits.

FY17 guidance was upgraded with NPAT and EPS growth of 12-14% (previously 10-12%).

Australian performance helped by admissions growth and procurement benefits

Reassuringly, the domestic business is seeing volume growth at historical levels (c5%), despite "volatility during a couple of months". Taken with price/mix leverage, we believe the business should continue to experience solid growth. In fact, we see upside with the procurement strategy, with more than A$40m in savings expected this year (adding an estimated c40bp to 1H margins).

Ramsay Pharmacy – adding to margin uplift

The establishment of a network of retail pharmacies is rapidly advancing, with 22 sites in the portfolio (1.4% contribution to Australian growth; A$30m revenue, cA$4m EBIT). With c60 sites targeted before the end of FY17, a material jump is expected in FY18, with significant opportunities to expand services over the medium and longer term.

CEO to retire – a loss, but the course is set and the fundamentals are sound

The announcement that CEO Christopher Rex will be retiring this year for personal reasons caught the market by surprise. An exceptionally competent leader, Mr Rex will certainly be missed, but the company is "bigger than any individual", and RHC has a strong management team and a solid strategy in place. We are confident that the guided succession plan will help the organisation remain on track.

Contributed by Derek Jellinek, Senior Analyst, Healthcare. Original blog here: (VIEW LINK)


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