Ramsay Health Care Limited's (ASX: RHC) success has been built on a sound growth strategy. This has caused its EPS to rise by 16.8% per annum during the last 10 years. This is a higher rate of growth than healthcare peers CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH). Their earnings have increased by 14.1% and 7% per annum respectively. In my view, there is more bottom line growth to come for Ramsay.
Investment
Ramsay invested heavily in its network of regional hospitals during the financial crisis. This enabled the company to use its capital expenditure more efficiently since development costs across the industry fell. The result of this was a lower cost base than many of its rivals, which has allowed Ramsay to develop near-monopoly status for many of its regional hospitals. This provides the company with a relatively consistent growth outlook for the long term.
Dominant position
This dominant position is boosted by the fragmented nature of the private hospital industry in Ramsay's two key markets; Australia and France. Smaller operators find adapting to new regulations which stipulate minimum nurse/patient ratios difficult. For Ramsay, this is easier due to its size and scale advantage. In my view, this means that there is scope for Ramsay to increase its market share in Australia and France in particular.
In the UK (which makes up 10% of Ramsay's sales), Ramsay enjoys a similarly dominant position through being one of the biggest private hospital providers to the NHS. A high return on invested capital (ROIC) from its UK operations means that an expansion of its operations is likely. The scope to do this has increased in recent months thanks to a weaker sterling.
Demographic tailwind
Participation rates for the private hospital sector in Australia have been high and stable at 48%. In my opinion, this rate will increase in future due to higher demand for hospital services from an ageing population. In 2012, Australia's median age was 37, but by 2040 it is forecast to be 41. At the same time, Australia's population is forecast to double by 2075, which is likely to increase demand for healthcare yet further.
Outlook
Through its brownfield development programme, Ramsay is well placed to capitalise on higher demand for its services. It approved $200 million in new brownfield capacity expansion in financial year 2016. Alongside this, its financial standing provides scope for large acquisitions. For example, its debt servicing costs were covered 6.1 times by operating profit in financial year 2016. This points to a capacity for greater leverage on its balance sheet.
Ramsay's shares have risen by 17% this year. This puts them on a P/E of 34.5. While higher than the ASX's P/E of 17.5, Ramsay's EPS is forecast to rise by 35% over the next two years. Alongside its dominant position, demographic tailwind and investment strategy, I believe that this makes it a buy. It could boost your portfolio returns, just as this investor was able to do when he turned $10,600 into $8 million.
