The share price of Australia's largest private hospital operator, Ramsay Health Care Limited (ASX: RHC) has fallen 9% over the last 12 months. The stock continues to underperform other large cap Australian healthcare stocks such as CSL Limited (ASX: CSL) and ResMed Inc. (CHESS) (ASX: RMD).
The weakness in Ramsay's share price has occurred following the release of some underwhelming profit results over the last couple of reporting seasons that have left investors questioning the level of its premium valuation multiple to the general market.
International worries
For the half year ended 31 December 2017, Ramsay saw group revenues rise 3.0% on the prior corresponding period to $4.4 billion with core earnings per share increasing 7.8% to 139.0 cents.
The company's Australian operations continue to be the standout within the group with revenues up 4.3% to $2.5 billion and earnings before interest and tax rising 9.1% to $379.7 million. Ramsay continues to achieve above market volume growth in Australia and its cost efficiency programs saw margins rise 67 basis points to 15.3%. However, it is Ramsay's international operations that are of concern to investors as they continue to lag its local operations.
For the first half of FY18, revenues in the United Kingdom fell 4.8% to £206.2 million with earnings before interest, tax, depreciation, amortisation and rent/restructuring costs (EBITDAR) declining 4.6% to £49.4 million. The National Health Service demand management strategies in the UK impacted volumes significantly, but the company should see a positive tariff adjustment take effect from April 1.
Ramsay's French operations saw revenue fall 1.1% in the first half to €1.1 billion with EBITDAR declining 5.8% to €194.1 million. Despite growth in admissions, the French business was impacted by a negative tariff setting. Looking forward, the March 2018 decrease in tariff was also lower than anticipated.
Ramsay has also recently entered into a global supply chain joint venture with Ascension, the largest private, tax-exempt, non-governmental health organisation in the United States. The costs of undertaking the joint venture are expected to be minimal to both groups and Ramsay's management expects a slight boost boost in earnings per share in the short term.
Outlook
At current prices Ramsay is trading for around 22 times FY18 earnings and 20 times FY19 earnings. Ramsay's impressive track record of above average growth warrants a valuation premium to the general market. However, the rate at which the company is growing its earnings has slowed and has seen that premium justifiably shrink. With the next reporting season still a couple of months away, I see Ramsay as a hold with a view to accumulate on any significant weakness.
