Ramsay Health Care: Conditions remain challenging - KKR revises bid

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

29 August 2022, 9:00 AM

Sectors Covered:

Healthcare

• Ramsay Health Care's (ASX:RHC) FY22 results continue to be materially impacted by COVID and higher costs, with margins contracting to multi-year lows and profit falling by double-digits.
• While COVID-related headwinds are slowly subsiding, supporting the eventual return of more normalised activity, we view inflationary pressures and work force issues as impediments to a full recovery in productivity.
• Despite lingering volatility and FY24 a “normal” trading year, it takes a back seat to KKR’s now revised offer, which we believe is likely to get up in some form.
• We have adjusted our FY23-24 earnings, rolled forward our valuation multiples, and maintained a takeout premium with a (login to view) price target. Move to Add.

Event

FY22 results were mixed, with earnings soft (NPAT A$274m, -39%; consensus A$321m), but revenue inline (A$13,740m, +3.1%; +4.6% in cc; consensus A$13,707m), albeit supported by COVID-related Government payments (A$138m) and NRIs (A$464m) and the Elysium acquisition (A$284m; 5 mos).

Adjusted EBIT (ex A$60.5m NRIs) fell 24% to A$831m and margins contracted (250bp, 6.3%), negatively impacted by COVID-related slowdown in activity levels, unfavourable case mix and higher costs.

OCF slid 52% to A$716m, on lower earnings and WC changes, mainly on reduced government grants, with the final dividend down 53% (48.5c).

No quantitative FY23 guidance was given, with management expecting a “gradual recovery” through FY23 and more “normalised” conditions from FY24 onwards.

Analysis

APAC (revenue -1.9%, A$5,361m; adj EBIT (ex NRIs A$39.4m) -27%, A$506m; margin -221bp, 9.4%); impacted by surgical restrictions, staff absenteeism ,cancellations, unfavourable mix, and increased COVID-related costs (A$264m, net cA$12m viability payments); in Jul-22, activity remains sluggish on pcp, but improved vs FY19 (surgical: -5%,+5%; non-surgical: -5%,-2%), with COVID-related costs quite elevated (Jul, A$38.7m).

UK (revenue +50%, A$911m; ex A$284m, Elysium, 5mos), +6.5% admissions; adj EBIT -113%, -A$5m, (ex A$23m Elysium and A$44.4m NRIs); admissions +6.5%, impacted by pre-COVID commercial arrangements with NHS (-70%), procedural cancellations, higher COVID related costs (cA$56m), inflationary pressures (5%+); inflationary pressures and labor shortages are likely to continue, with activity levels subject to COVID’s evolution, but expected to increase over the medium term, with new capacity, NHS and private patient growth, and full contribution from Elysium.

EU (revenue +3.3%, A$7,064m; EBIT +12%, A$450m; margins -50bp, 6.4%), underpinned by the Nordics (mix toward primary care and specialist clinics; EBIT +55%, A$72m), but offset by COVID-related costs, mainly in France, and inflationary pressures, with use of agency staff on higher absenteeism; French Government to extend revenue guarantee, 1-Jul-22 to 31-Dec-22, and GHP closing is expected to positively contribute; increased activity depends on COVID and operations will continue to be impacted by inflationary cost pressures.

Forecast and valuation update

FY23-24 underlying earnings are adjusted lower, 6.4%/7.5%, respectively, reflective of an ongoing challenging operating environment.

We maintain a takeover premium, with an (login to view) based price target.

Investment view

While all eyes are focused on the KKR bid outcome, the operating environment remains unpredictable and dynamic, with COVID, doctor/patient behaviour, costs and workforce issues all defining the earnings profile.

Price catalysts

• AGM 29 Nov-21.
• Dividend record data 6 Sept-22.
• Dividend payment 29 Sept-22

Risks

• KKR’s bid increasing/being pulled/rejected by the Board.
• PHI vagaries.
• COVID-19 impacts.
• Stronger/ weaker volumes.
• Margin compression/expansions.
• Regulatory changes.
• Faster/slower Capio integration.

Find out more

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