Ramsay Health Care Limited (ASX: RHC) has outperformed healthcare sector peers CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) in the last five years. Its shares have risen by 331% versus 263% for CSL and 88% for Cochlear. In my view, there is more growth to come for Ramsay in the long run.
Finances
Ramsay's financial standing is sufficient to allow it to invest in future growth opportunities. For example, in the 2016 financial year it increased net cash flow from operating activities by 21.3% to $905 million. This enabled it to increase capital expenditure by 5% to $510 million and it means that Ramsay's free cash flow was $394 million.
Capital expenditure could increase at a faster rate than operating cash flow in order to fund Ramsay's brownfield development programme. This will see it deliver over $200 million of future developments alongside the $300 million from financial year 2016.
Ramsay has the ability to increase debt levels. Its net debt to equity ratio of 152% is not excessive in my view when the company's highly visible earnings profile is taken into account. This will allow it to engage in further acquisitions. Its history of successful integrations such as the recently acquired HPM Group in France make it an obvious means of growing earnings.
Strategy
Although it has exited the joint venture in China, I feel that the country offers growth potential in the long run. That's because of the demographic tailwind which exists as a result of an ageing population and increasing wealth of the middle class. When combined, they will cause spending on healthcare to rise and this could provide a growth opportunity for Ramsay.
It already has exposure to Indonesia and Malaysia and although acquisition multiples in Asia are high, I feel that they are worth paying in order to access high growth rates.
Alongside growth prospects in its hospital offering, Ramsay will diversify through the opening of pharmacies across the world. This creates a new growth channel which will complement Ramsay's presence in this space. It will have a competitive advantage over many rivals since it will be able to cross-sell its post discharge services to already treated patients. This may allow for higher margins as well as more stable earnings.
Ramsay also has an opportunity to grow through public/private partnerships. For example, in the UK over 75% of its patients are referred from the NHS. This makes Ramsay the biggest provider in NHS referrals in the UK. This shows that private hospitals such as Ramsay can gradually play a more prominent role in public sector health provision. In my view, this means that while Brexit may cause some cost cutting in the UK and France, Europe remains a lucrative growth space for Ramsay.
Dividends
Ramsay's free cash flow covered dividends 1.71 times in financial year 2016. That's despite a rise in dividends of 18%. When combined with Ramsay's earnings growth potential, its dividend could rise at a faster pace than 18% over the medium term. Ramsay's yield of 1.7% is lower than popular dividend stocks such as Australia and New Zealand Banking Group (ASX: ANZ) which has a yield of 6.6%.
However, in my view its rapidly rising dividend means that it could become a realistic purchase for income investors over the long run. This could act as a catalyst on its share price.
