The awful third quarter earnings update from Ramsay Healthcare simply reflects the damage from COVID-induced lockdowns and floods in Australia. The outlook is decidedly more positive as hospital capacity is stretched to catch up on delayed surgeries. We expect the bidders see the same picture.
RHC’s weak 3Q22 trading update merely documents the impact from COVID on various aspects of its business. Australian Medicare data shows that surgical admissions in the March quarter fell 9.3% so it is wholly unsurprising that RHC Australian hospitals reported an $89 million cost hit from lockdowns and floods.
The last two years of pandemic disruption have severely hampered RHC’s earnings. The next few years will untangle that damage and more. Indeed, the public sector needs substantial assistance from the private hospital sector which will ensure RHC’s utilisation rate will be stretched but will attract a high yield.
We reiterate that RHC is one of only a handful of global hospital operators with the capacity to take up the public sector assistance. This creates a scarcity value in RHC’s assets that we do not believe is reflected in the bid price.
There is certainly an underlying benefit in the value of RHC’s land and buildings that could be leveraged by the bidder.
The potential for a sale and leaseback of these assets could unlock around $4 billion in upside to the book value of the assets.
Despite a 40% gain in UK revenue, including Elysium, on-going UK costs saw underlying EBIT fall 95% in the quarter. French government guarantees helped the European segment deliver 73% EBIT growth along with solid Nordic growth.
RHC is now seeing a post-Easter rebound in activity, but this is still mired in COVID-related costs.
Investment view
Since the KKR consortium made its bid in February (and recently confirmed in April), it has not adjusted for a number of events that potentially add value to the group such as the IHH bid for the SDH Malaysia JV with RHC or the 1H22 interim result.
We think the KKR bid is already stale and could easily go higher. The bid represents a PE ratio of 28x next year’s earnings and is in line with historical PE ratios. It does not adequately capture the significant earnings upside from the catch-up phase in surgery backlog caused by COVID-19 disruption.
Risks to investment view
Any changes to regulatory and payer settings (Private Health Insurance) and prosthesis cuts would impact earnings. A slower restart to elective surgery would affect the rate of earnings recovery. Any resurgence of COVID would be a negative event.
Recommendation
We have retained our Buy recommendation.
