Having been commandeered for so long to provide capacity for COVID 19, Ramsay’s hospitals are about to cope with a huge backlog of elective surgery. The hospital business recovery is underway.
COVID ruined yet another half year for RHC, so the result is not very useful other than reminding us of the very large amount of work ahead to normalise the hospital systems in each region.
Even so, 1H22 was no disaster. Group EBIT declined 16.2% to $489 million with the UK business hit hardest and longest by COVID disruptions. The UK incurred on-going high costs of operating in a COVID environment including testing patients, doctors and staff together with higher PPE costs, in total estimated to have cost £3 million per month.
Omicron hit the Australian business hard in January 2022 to the tune of $48 million. That will be in addition to our estimate of $107 million in 1H22 but no detail of government payments was given.
Investment view
Finally, surgical restrictions have been lifted in Australia, and the UK is 'fully committed’ to re-opening. This puts RHC on the threshold of a material recovery in volumes and profitability. RHC is now seeing forward operating theatre bookings climb quickly and expects 4Q22f will see surgery activity above pre-COVID levels.
COVID risks have certainly not gone away, but the government now understands that any further deferral of non-COVID care also poses extreme risk for many patients. We estimate that more than 30% of annual private elective surgery has been either deferred or missed. Public waitlists understate the unmet demand so private hospitals will benefit by picking up the slack. This will mean a high cadence of hospital utilisation for a considerable period of time.
In each jurisdiction, there are significant clinical and nursing shortages and disruption from COVID isolation requirements. We think high incremental margin will offset the higher staff and COVID costs, helping RHC to return to pre-COVID levels.
RHC also now has the UK mental health provider, Elysium Healthcare to keep it busy heading into FY23f.
RHC’s earnings recovery will manifest in FY23f but the recovery is already underway.
The company did not provide any earnings guidance but given the circumstances this was not surprising. Normal conditions are still some way off.
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.
