Looking healthier

1H23 RESULT

Need To Know

• 2Q strong exit run rate (EBIT up ~120% on 1Q)
• Outlook remains ‘strong’. February 2023 has seen a ‘return to positive momentum in surgical activity levels’
• 50cps dividend declared, up 3.1%

RHC delivered a strong result, with EBIT above consensus ($550 vs ~$490m, although there may be some acquisitions missing from these numbers) and up 13.2% CC on the prior year. The result benefitted from growth in surgical activity across all regions, skewed more heavily towards day surgery. Recovery in non-surgical activity has been inconsistent, with mix changes impacting overall margins. The direct impact of Covid declined from $66.8m to now immaterial levels in Q2, with some residual impacts expected to continue for the foreseeable future. RHC declared a 50cps dividend, up 3.1%, a payout ratio of just over 60%, in line with its 60-70% policy and the DRP was reinstated.

Acquisitions contributed strongly with Elysium and GHP contributing $38.8m in EBITDA at the result. The company continues to invest in its network and adjacent services, with a further $179m invested in growth projects, and $41m invested in digital and data initiatives driving growth in capacity to meet future demand and improve operating efficiency. 

New agreements signed with key private payors in Australia and the UK that more reflect the recent cost environment. RHC remains focused on improving productivity to mitigate cost pressures. In Europe, government support was $227m vs $203m in the period, however high inflation rates combined with increases in staff expenses increased costs beyond payor compensation. Staff shortages continues to impact the industry globally.

Leverage increased to 3.5x, with the banks agreeing to increase the maximum allowable ratio to 4x to consider short-term Covid impact. Whilst this is far higher than history, RHC expect this to decrease as trading improves. 

The outlook remains ‘strong’ with RHC expecting a ‘gradual recovery through FY23 and more normalised conditions from FY24 onwards.’ The exit run rate is solid, with Q2 EBIT rising 120% over Q1, despite a temporary slowing in December because of another Covid wave. Positive surgical momentum has returned in February. 

Investment View

The result was strong, and the exit run rate is demonstrating clear momentum recovery. The higher debt and continued labour shortages remain a slight concern; however the trading conditions outlook is favourable. We expect continued positive momentum, retaining our Buy recommendation.

Figure 1: Strong UK recovery, APAC maintaining margins