Ramsay Health Care Limited (ASX: RHC) has a mix of defensive characteristics and growth prospects which have caused its shares to rise by 21% in the last year. This is ahead of sector peer CSL Limited (ASX: CSL) and the ASX, which are up 18% and 3% respectively. Further capital gains are ahead for Ramsay in my view due to its demographic tailwind, acquisition potential and expansion strategy.
Demographics
Over 10% of the world's population is now aged over 65 years. Further, the number of people aged over 60 is forecast to more than triple by 2050. This means that there is a large and rapidly growing target market for Ramsay, since chronic diseases are more prevalent with older age. Allied to this is an increase in therapeutic innovations, such as new technology, which will increase demand for hospital treatment.
Ramsay is well-placed to benefit from this demographic tailwind. It has exposure to three key markets (Australia, France and the UK) where an ageing population means that demand for healthcare is rising. Growing pressure on public healthcare systems means that there is rising demand for private healthcare specifically, with private health insurance membership in Australia now at 47.2% and increasing.
Acquisition potential
Ramsay has a proven operating model which has been able to successfully integrate multiple acquisitions. Looking ahead, it is set to be active in the M&A space and its financial standing provides the flexibility for it to do so. For example, Ramsay's free cash flow has averaged $288 million over the last two financial years, while its interest repayments of $126 million were covered over 6 times by operating profit last year.
This indicates that Ramsay can increase borrowings to fund further acquisitions. Although its joint venture in China failed, it has identified Asia as a key growth area for the long term. For example, China and India have the highest number of diabetics in the world, while its established presence in Malaysia and Indonesia provides a platform for growth in the region.
Expansion strategy
Ramsay's brownfield development strategy is driven by unmet demand. It plans to open 400 beds and 12 operating theatres in the 2016 calendar year which will cost as much as $197 million. This strategy is sound because it involves multiple smaller developments which allow Ramsay to become geographically diversified. This reduces the company's risk profile, but also enables Ramsay to implement incremental technological advances to gain a competitive advantage over its rivals in what is an increasingly competitive private healthcare space.
Although Ramsay has a P/E ratio of 32, this is lower than healthcare sector peer Cochlear Limited (ASX: RHC). It has a P/E ratio of 40. Due to Ramsay's expansion strategy, demographic tailwind and acquisition potential, it would be unsurprising for its shares to move higher in the long run.
