The Ramsay Health Care Limited (ASX: RHC) share price has been an underperformer over the last 12 months.
However, one leading broker believes its shares could soon be heading notably higher from here.
What happened?
This morning analysts at Goldman Sachs upgraded and added the private hospital operator's shares to its conviction buy list with an improved price target of $70.00.
This implies potential upside of almost 20% over the next 12 months including the 1.4% dividend yield Goldman is forecasting.
Why is Goldman Sachs positive on Ramsay?
According to the note, Ramsay's shares are currently changing hands at 8.1x earnings before interest, tax, depreciation and amortisation (EBITDA) for an 8% EBITDA compound annual growth rate (CAGR) (FY21-24E). This is towards the bottom of its five-year range.
And while the broker sees various industry challenges over the long term, for now it believes the improvement in near-term fundamentals has not yet been reflected in either consensus forecasts or current trading multiples.
As a result, it expects improvements in both to drive its outperformance through 2021.
In respect to the near-term, the broker commented: "Contrary to many other hospital groups globally, most of RHC's core market (Australia, 65% of EBIT) has been operating largely unencumbered since July, and entirely without volume limitations since end-November."
"Reflecting a material backlog, we estimate current surgery volume growth of +7-9%, approximately double long-term rates (+4%), driving an extended period of elevated utilisation and more favorable cost absorption than seen for many years. Furthermore, in recent months, the industry has seen a strong recovery in the margin-accretive 'medical specialties', which had lagged conventional surgery volumes in prior recent quarters, likely contributing to further margin relief," it added.
And while it notes that considerable uncertainty persists in Europe, it points out that much of the downside risk is being limited through government support. Furthermore, the broker expects trading conditions in that market to improve once vaccines are rolled out.
In light of this, the broker sees "scope for improved volume and margin dynamics in FY22-23E" across all markets if PPE costs also taper through this period as it expects.
Overall, it feels this makes the Ramsay share price great value at the current level.
