Healius: One stock idea for the next correction

A sizeable retracement in the ASX 200 in October 2018 provided a golden opportunity to invest in Ramsay Health Care (RHC). 

Ramsay’s share price had already undergone a material de-rating over the previous 18 months with its price-earnings ratio falling from c.27 times in FY17 to c.19 times in FY19.

Growing pressure on government tariffs and concerns around healthcare affordability resulted in a markedly slower trajectory in earnings per share growth. Indeed, the consistency of achieving double-digit eps growth had withered to low single-digit growth. Nevertheless, the medium and long-term thematic of rising chronic disease and ageing demographics were supportive drivers for health care providers. We firmly believed, as one of the world’s largest private hospital operators, Ramsay remained well placed to be a beneficiary of the irreversible ageing of populations.

Ramsay’s acquisition of Capio (a vertically integrated European health care provider) highlighted Ramsay’s recognition of the potential benefits in broadening its revenue base across the ageing populations of Europe. The acquisition provided valuable scale to its existing European business and exposure to new adjacent revenue streams in primary and specialist care.

It was our belief that Ramsay’s de-rating of its share price adequately captured concerns over health care funding and affordability.

In November 2018 as investors were experiencing a painful repricing in global equities as tightening liquidity conditions and heightened geopolitical concerns weighed heavily on investor sentiment, we purchased Ramsay at an average price of $55.52. Ramsay’s share rebounded notably over the course of 2019, finishing the year at $72.53, up 30% on our original purchase price.

Q: Please provide an update on Ramsay. Does it still look like an attractive investment proposition?

With the recent reporting delivering a myriad of downgrades and weaker profit outlooks, the Healthcare sector offered greater stability and few negative earnings surprises. Ramsay’s FY19 was in line with guidance with most segments delivering modest growth.

In Australia (RHC’s largest division) delivered a solid result despite the ongoing pressures in private health insurance relating to affordability and volume growth. The tariff headwinds of its UK and France operations had abated and cost reductions remained a key focus. Conversely, the synergistic benefits of the acquisition of Capio were taking longer than expected to materialise and would not be EPS accretive until FY21.

Ramsay continues offer investors a level of stability with low single-digit earnings growth. The demand for healthcare is well supported as developed world populations grow older, with the proportion of people over 65 years and older rising over the next decade. However, we would contend that this is now largely captured in Ramsay’s valuation, with the stock trading at a price earnings ratio of c.22 times in FY20.

Q: Which other stock would you like to buy in the event of another major correction?