The shares of Ramsay Health Care Limited (ASX: RHC) will come under focus today after the private hospital operator released its full year results to the market revealing a 16.8% increase in core net profit after tax to $481.4 million.
Whilst this is undoubtedly a strong performance and comes in at the top end of guidance provided in its half year results announcement, the outlook for FY 2017 isn't as strong as many were expecting.
For FY 2017 Ramsay is targeting core net profit after tax growth of 10% to 12%. With the shares changing hands at 33x core earnings, I'm sure many will feel that it's quite a premium for growth of this level.
But it is worth remembering that Ramsay's management more often than not will under-promise and over-deliver. This time last year they guided to full year core net profit after tax growth of 12% to 14%, but ultimately delivered almost 17% annual growth.
Thankfully the market appears to have taken this all into account today and its shares are higher by almost 7% in morning trade.
I was impressed with the private hospital operator's results. There had been concerns over its operations in Europe following the Brexit, but these results put those fears to bed. Its France segment produced a 27.3% increase in revenue to €2.2 billion and its UK segment grew revenue by 4% to £429.6 million
Ramsay's Australian and Asian business achieved revenue growth of 8.8% thanks to solid volume growth, brownfield developments, and ongoing efficiencies. This helped lift total company revenue by 18.1% to $8.7 billion for the year.
I believe the positive reaction by the market today could be partly due to the strong result and partly down to Ramsay's future plans. Management revealed that it plans to extend its operation of pharmacies beyond its hospital walls.
Ramsay is in the process of establishing strategically located community pharmacies throughout Australia, concentrating initially on ones within close proximity to its hospitals. Management believes it will allow Ramsay to provide extended services to patients including participation in the provision of care to the chronically ill.
It then advised that the company continues to investigate opportunities in China, explaining that the nation remains an attractive opportunity. This was no doubt pleasing to hear for investors, as many were disappointed that the company pulled out of a joint venture in China earlier this year.
But that joint venture didn't satisfy all of the company's requirements, so pulling out was the right move in my opinion. Although expanding into China could prove to be incredibly lucrative, getting it wrong would be very costly.
Overall I believe this was a very strong result and although guidance was a little below expectations, I feel confident that this will be upgraded in its half year report.
Whilst I am very bullish on Ramsay in the long-term and believe it deserves to trade on similarly high earning multiples to fellow healthcare juggernauts CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH), investors might want to wait in hope of a slight pull back in its share price before making an investment.
