Ramsay Health Care Limited (ASX: RHC) is a global hospital group operating 235 hospitals, day surgery centres, treatment facilities, rehabilitation and psychiatric units and a nursing college across Australia, France, the United Kingdom, Italy, Indonesia and Malaysia. It is one of the top five private hospital operators in the world.
Shares of Ramsay currently trade at $61.43 – a decrease of 11.5% over the previous twelve months. The 52 week high is $76.18, and the 52 week low is $61.06. With earnings per share of $2.36 in 2017, shares are currently trading at a price to earnings ratio of 26.1 based on 2017 earnings. Analysts have forecasted earnings of $2.86 per share in 2018, an increase of 21% on the previous 12 months. This puts the current share price at a price to earnings ratio of 21.4 based on forecasted 2018 earnings.
In the last 10 years, Ramsay has grown its book value at an annualised rate of 8.9%. The current price to book ratio is 5.5. Over the same period, Ramsay has grown earnings at an annualised rate of 16.3%, and its cash flow at 18.1%.
Over its last 5 financial reports, Ramsay's return on invested capital has ranged from 19.7% to 25.1%, and has averaged 21.8%. This represents a relatively strong return over that period.
In 2017, Ramsay paid a fully franked dividend of $1.345.
So what are the shares worth?
According to its 2017 financial report, Ramsay held $3.26 billion in interest bearing debt, and $419.5 million in cash and equivalents. At a current market cap of $12.55 billion, Ramsay's enterprise value is around $15.4 billion. With earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.26 billion, the company's enterprise multiple is around 12.25. An enterprise multiple of 10 would be a fair to cheap price to pay, and this would necessitate a market capitalisation of around 9.7 billion, and a share price of $48.12.
A discounted cash flow model using the historical growth rate in book value as the growth rate for the next 10 years and then a 2% growth rate thereafter, capital expenditures equal to those in 2017, and a required return of 10% per year places the intrinsic value of the shares around $78.00. This is, of course, heavily dependent upon the growth rate and your required return. A required return of 15% would place the intrinsic value at around $55.50.
FOOLISH TAKEAWAY.
Based on the above, and in consideration of the tailwinds in the form of an ageing population, shares are probably worth somewhere between $48.00 and $56.00, less any margin of safety that you desire. However, the calculation of intrinsic value is not an exact science and is dependent on many factors. Given the historical growth in book value and returns on invested capital, I'd be happy to buy the shares at around $50.00.
