Download Ramsay Health Care 2013 12 18 - Price sensitive

18 December 2013
Asia Pacific/Australia
Equity Research
Healthcare Facilities (Health Care (AU))
Ramsay Health Care
(RHC.AX / RHC AU)
Rating
Price (18 Dec 13, A$)
Target price (A$)
Market cap. (A$mn)
Yr avg. mthly trading (A$mn)
Last month's trading (A$mn)
Projected return:
Capital gain (%)
Dividend yield (net %)
Total return (%)
52-week price range
NEUTRAL*
41.61
41.50¹
8,408.60
305
348
-0.26
2.1
1.8
41.7 - 26.2
* Stock ratings are relative to the relevant country benchmark.
¹Target price is for 12 months.
Research Analysts
Saul Hadassin
61 2 8205 4679
[email protected]
William Dunlop, CFA
61 2 8205 4405
[email protected]
Total return forecast in perspective
40%
30%
20%
10%
0% CS tgt^
-10%
-20%
-30%
-40%
12mth Volatility*
Performance over
Absolute (%)
Relative (%)
Sh Prc
Mean^
52wk Hi-Lo
1M
8.9
14.3
IBES Consensus
target return^
3M
13.6
17.3
12M
58.8
47.9
Relative performance versus S&P ASX 200.See Reference
Appendix for a description of the chart. Source: Credit Suisse
estimates, * Consensus, mean range from Thomson Reuters
STRATEGIC ANALYSIS
Price sensitive
■ RHC is price sensitive: RHC's equity valuation is highly sensitive to the
outcomes of its price negotiations with Australian insurers. Analysis implies
that RHC has received a 1.1% CAGR in real pricing from insurers (~3.7%
nominal) since FY09. Due to increased pressure on insurer margins from
escalating claims inflation, we expect insurers will be more demanding in
price negotiations and hence we expect real pricing to grow below the recent
historic CAGR – in our view hospital operators will need to be somewhat
accommodative in order to keep the industry in equilibrium. Indeed our
current valuation of A$41.50 implies a ~0.7% CAGR out to FY20. Scenario
analysis indicates that continuation of historical pricing dynamics (i.e., a
1.1% CAGR) would result in RHC's Australian hospitals' ROIC rising from
14.7% (FY13E) to 18.5%, and a DCF valuation of A$46.50, 12% higher than
our current A$41.50 DCF. However, if only 0% real pricing CAGR occurs, we
estimate Australian hospitals' ROIC would fall to 12.7% (FY20) while DCF
would be 22% lower (A$32.20).
■ Consumers are relatively inelastic? The sustainability of the private
insurance/hospital system to a large degree depends on consumer price
elasticity of demand, which in our view remains relatively inelastic. That said,
the recent cover "buy-down" evidenced by several larger insurers suggests
consumers are not necessarily willing to incur significant increases in a
single year. We believe consumers are however likely to continue to absorb
mid-upper single digit premium increases that at least facilitate pass through
of positive price increases from insurers to hospital providers. We would
argue that the single biggest risk to private insurance levels (and the system
in general) is a recession and an associated high level of unemployment.
■ Catalysts: 1H14 result (Feb-14); PHIAC data (Feb-14); insurer reporting.
■ Valuation: RHC trades on 24.7x 12mth forward EPS.
Financial and valuation metrics
Year
Revenue (A$mn)
EBITDA (A$mn)
EBIT (A$mn)
Net income (A$mn)
EPS (CS adj.) (Ac)
Change from previous EPS (%)
Consensus EPS (Ac)
EPS growth (%)
P/E (x)
Dividend (Ac)
Dividend yield (%)
P/B (x)
Net debt/equity (%)
06/13A
4,174.5
627.7
485.2
275.4
148.01
n.a.
n.a.
23.0
28.1
70.50
1.7
6.5
64.1
06/14E
4,776.0
724.4
557.3
319.2
168.39
—
157.60
13.8
24.7
81.67
2.0
5.8
61.2
06/15E
5,205.0
812.0
633.7
366.1
192.00
—
180.50
14.0
21.7
93.10
2.2
5.1
50.0
06/16E
5,564.7
864.2
679.6
399.2
199.54
—
202.20
3.9
20.9
102.08
2.5
4.5
37.2
Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against
ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
18 December 2013
Figure 1: Financial summary
Ramsay Health Care (RHC)
2012
2013
2014
Year2015
ending 30
Jun
2016
12/18/2013 12:37
Share Price: A$41.61
NEUTRAL
Rating
Target Price
A$
41.50
vs Share price
%
-0.26
DCF
A$
41.50
Ramsay Health Care Ltd owns & operates private hospitals. It principally operates in Australia,
Indonesia, France & the UK & caters to a range of health care needs from day surgery
procedures to highly complex surgery, & psychiatric care & rehabilitation.
Profit & Loss
06/12A
06/13A
06/14E
06/15E
06/16E
Sales revenue
EBITDA
Depr. & Amort.
EBIT
Associates
Net interest Exp.
Other
Profit before tax
Income tax
Profit after tax
Minorities
Preferred dividends
Associates & Other
Normalised NPAT
Unusual item after tax
Reported NPAT
3,956.5
583.5
(144.7)
438.8
0.0
(72.9)
0.0
365.9
(110.9)
255.0
(2.3)
17.7
(35.4)
235.0
(8.5)
226.5
4,174.5
627.7
(142.4)
485.2
0.0
(65.4)
0.0
419.8
(126.3)
293.5
(2.6)
15.5
(31.0)
275.4
(24.5)
250.9
4,776.0
724.4
(167.1)
557.3
0.0
(70.7)
0.0
486.6
(147.0)
339.6
(6.0)
14.4
(28.8)
319.2
(24.5)
294.8
5,205.0
812.0
(178.4)
633.7
0.0
(73.7)
0.0
560.0
(168.7)
391.3
(10.8)
14.4
(28.8)
366.1
(25.8)
340.4
5,564.7
864.2
(184.7)
679.6
0.0
(71.4)
0.0
608.2
(183.1)
425.1
(11.5)
14.4
(28.8)
399.2
(8.1)
391.2
Balance Sheet
06/12A
06/13A
06/14E
06/15E
173.4
105.0
422.2
48.6
749.2
1,846.5
870.6
119.6
2,836.7
3,585.9
430.8
1,069.1
679.9
2,179.7
1,406.2
1,161.8
-7.8
0.0
1,406.2
895.6
272.3
112.6
482.8
112.7
980.4
1,970.1
985.3
126.6
3,082.0
4,062.4
470.6
1,260.8
789.2
2,520.6
1,541.8
1,291.7
-2.1
0.0
1,541.8
988.5
281.3
126.8
525.0
112.7
1,045.8
2,133.1
1,119.4
126.6
3,379.1
4,424.9
523.3
1,340.8
829.7
2,693.7
1,731.2
1,475.1
4.0
0.0
1,731.2
1,059.5
368.0
135.6
563.4
112.7
1,179.7
2,220.2
1,157.7
126.6
3,504.5
4,684.2
559.5
1,340.8
838.3
2,738.6
1,945.6
1,678.7
14.7
0.0
1,945.6
972.8
06/12A
06/13A
06/14E
06/15E
06/16E
438.8
-103.8
144.7
-91.2
18.8
26.6
433.9
-222.2
485.2
-70.5
142.4
-121.1
-28.4
42.7
450.4
-265.6
557.3
-76.1
167.1
-106.5
-3.8
0.0
538.1
-298.4
633.7
-79.1
178.4
-160.1
-10.9
0.0
561.9
-263.8
679.6
-79.1
184.7
-175.6
-8.6
0.0
600.8
-229.4
-142.0
-80.2
-160.6
-105.0
-190.0
-108.4
-140.0
-123.8
-100.0
-129.4
38.1
0.0
4.6
-179.4
-128.4
-9.6
-160.7
-5.3
-304.1
-49.7
-3.4
-53.1
-91.1
0.0
15.3
-341.4
-143.4
-32.3
157.2
0.0
-18.4
90.6
8.2
98.8
-165.7
0.0
5.4
-458.8
-150.3
0.0
80.0
0.0
-70.3
9.0
0.0
9.0
-40.0
0.0
5.4
-298.4
-176.9
0.0
0.0
0.0
-176.9
86.7
0.0
86.7
-20.0
0.0
7.8
-241.7
-194.9
0.0
0.0
0.0
-194.9
164.3
0.0
164.3
Cash & equivalents
Inventories
Receivables
Other current assets
Current assets
Property, plant & equip.
Intangibles
Other non-current assets
Non-current assets
Total assets
Payables
Interest bearing debt
Other liabilities
Total liabilities
Net assets
Ordinary equity
Minority interests
Preferred capital
Total shareholder funds
Net debt
Cashflow
EBIT
Net interest
Depr & Amort
Tax paid
Working capital
Other
Operating cashflow
Capex
Capex - expansionary
Capex - maintenance
Acquisitions & Invest
Asset sale proceeds
Other
Investing cashflow
Dividends paid
Equity raised
Net borrowings
Other
Financing cashflow
Total cashflow
Adjustments
Net change in cash
otherwise stated
2013 In AUDmn,
2014 unless 2015
2016
2012
Earnings
06/12A
06/13A
06/14E
06/15E
06/16E
204.1
168.4
13.8
15.2
81.7
48.5
100.0
210.5
30.2
204.1
192.0
14.0
15.6
93.1
48.5
100.0
214.7
30.1
204.1
199.5
3.9
15.5
102.1
51.2
100.0
231.0
30.1
Equiv. FPO (period avg.)
c_EPS_SHARES
c_EPS*100
EPS (Normalised)
EPS_GROWTH*100
EPS Growth
mn
c
%
202.4
120.3
c_EBITDA_MARGIN*100
EBITDA Margin
c_DPS*100
DPS
c_PAYOUT*100
Payout
Franking
FRANKING*100
c_FCF_PS*100
Free CFPS
c_TAX_RATE*100
Effective tax rate
%
c
%
%
c
%
14.7
60.0
49.9
100.0
174.7
30.3
202.6
148.0
23.0
15.0
70.5
47.6
100.0
170.5
30.1
x
x
x
%
%
x
34.6
21.2
15.9
1.4
4.2
7.3
28.1
19.4
15.0
1.7
4.1
6.5
24.7
17.0
13.1
2.0
5.1
5.8
21.7
14.8
11.6
2.2
5.2
5.1
20.9
13.6
10.7
2.5
5.6
4.5
%
20.2
21.3
21.6
21.8
21.0
%
5.9
6.6
6.7
7.0
7.2
x
1.1
1.0
1.1
1.1
1.1
x
3.1
3.1
3.0
2.8
2.6
6.6
13.3
6.8
13.4
7.2
13.9
7.8
15.2
8.1
15.9
38.9
1.5
8.0
6.0
5.6
164.0
39.1
1.6
9.6
7.4
6.4
191.8
38.0
1.5
10.2
7.9
6.2
180.4
33.3
1.2
11.0
8.6
5.1
149.3
27.1
0.9
12.1
9.5
4.1
125.4
Valuation
c_PE P/E
c_EBIT_MULTIPLE_CURR
EV/EBIT
c_EBITDA_MULTIPLE_CU
EV/EBITDA
c_DIV_YIELD*100
Dividend Yield
c_FCF_YIELD*100
FCF Yield
c_PB Price to Book
Returns
c_ROE*100
Return on Equity
c_I_NPAT/c_I_SALES*100
Profit Margin
Asset Turnover
c_I_SALES/c_B_TOT_ASS
Equity Multiplier
c_ASSETS/c_EQ_COMMON
c_ROA*100
Return on Assets
c_ROIC*100
Return on Invested Cap.
%
%
Gearing
c_GEARING*100
Net Debt to Net debt + Equity
%
c_NET_DEBT/c_I_EBITDA
Net Debt to EBITDA
x
Int Cover
c_I_NET_INTEREST
(EBITDA/Net Int.)
x
06/16E c_I_EBITDA/
532.2 c_I_EBIT/
Int Cover
c_I_NET_INTEREST
(EBIT/Net Int.)
x
143.5 (c_C_CAPEX/c_I_SALES)*-100
Capex to Sales
%
596.6 (c_C_CAPEX/c_I_DEPR)*-100
Capex to Depreciation
%
112.7
1,385.0
MSCI IVA (ESG) Rating A
2,266.6
1,176.0
9.8
126.6
8.8
3,569.3
7.8
4,954.3
6.8
592.0
5.8
1,340.8
4.8
845.7
3.8
2,778.5
2.8
2,175.8
1.8
1,897.4
Environment Social Governance
26.2
Stock
Local Sector
0.0
Country
Global Sector
2,175.8
Source: MSCI ESG Research
808.6
Credit Suisse View
TP ESG Risk (%): -1
TP Risk Comment: RHC has an impeccable social and
governance reputation and robust corporate governance policies.
Further, its business has a limited environmental impact. As such
we value the ESG risk to our target price at a minimal level. Our
ESG risk is calculated by adding a small risk premium to our DCF
discount rate.
MSCI IVA Risk: Neutral
MSCI IVA Risk Comment: A' rating. Long history of good
governance, high quality service offering. There is some risk RHC
could come under scrutiny in the UK for incentives to surgeons,
and to a lesser extent perhaps in Australia - this is a matter of
judgement though. Nothing would cause us to think a controversy /
adverse event may arise at the moment though - anything adverse
would likely be politically motivated given we understand RHC has
been operating in its current form for years.
Share Price Performance
42.60
40.60
38.60
36.60
34.60
32.60
30.60
28.60
26.60
24.60
6/12/2012
6/02/2013
6/04/2013
6/06/2013
RHC.AX
Absolute
Relative
1 Month
8.9%
14.3%
6/08/2013
6/10/2013
6/12/2013
XJO
3 Month
13.6%
17.3%
12 Month
58.8%
47.9%
Source: Reuters 52 week trading range: 26.39-41.66
Source: Company data, Credit Suisse estimates
Ramsay Health Care
(RHC.AX / RHC AU)
2
18 December 2013
Table of contents
Price sensitive
RHC's recent ROIC history
Australian hospitals ROIC growth
International investments have held ROIC down
Can Australian ROIC growth continue?
Volume - operating theatre-driven
Price – RHC has demonstrated leverage with insurers
Costs – savings have led to subdued growth
Invested capital – operating theatres are a guide
Forecasting ROIC
Organic volume growth of 2.0%
Organic pricing growth of 0.2% via ageing mix shift
Organic costs - growth assumes flat EBIT margin
Brownfields - estimate ROIC of 15% after 3 years
Implied future ROIC
Scenarios and sensitivity
Appendix
4
5
5
6
7
7
8
10
11
14
14
15
16
16
17
18
21
Ramsay Health Care
(RHC.AX / RHC AU)
3
18 December 2013
Price sensitive
RHC's equity valuation is highly sensitive to the outcomes of its price negotiations with
Australian insurers (Figure 2). Using a bottom-up analysis of key variables we estimate
that only a 0.1% change in the 10-year CAGR of the real pricing RHC receives from
insurers equates to a 3.1% differential in RHC valuation.
Indeed RHC's ability to extract an estimated 1.1% real pricing CAGR (3.7% nominal) from
funders since FY09 has been a key determinant of its rising Australian hospital ROIC. Due
to increased pressure on insurer margins from escalating claims inflation (as evidenced by
the recent difficulties between Medibank Private and RHC in finalising contracted pricing),
we expect insurers will be more demanding in price negotiations and hence we expect real
pricing to grow below the recent historical CAGR - our current valuation of A$41.50 implies
a ~0.7% CAGR out to FY20. In our view hospital operators will need to be somewhat
accommodative in order to keep the industry in equilibrium.
Scenario analysis indicates that a continuation of historical pricing dynamics (i.e. a 1.1%
CAGR) would result in RHC's Australian hospitals' ROIC rising from 14.7% (FY13E) to
18.5%, and a DCF valuation of A$46.50, 12% higher than our current A$41.50 DCF.
However in a scenario where RHC achieves only a 0% real pricing CAGR, we estimate
Australian hospitals' ROIC would fall to 12.7% (FY20) while DCF would be 22% lower
(A$32.20).
Figure 2: Historical ROIC and forecast ROIC under various price CAGR scenarios
19%
18.6%
Forecast ->
18.2%
18%
17.7%
17.2%
17%
16.8%
16.7%
Australia ROIC
16.2%
16.1%
16.4%
16.6%
15.9%
16%
15.7%
15.5%
15.3% 15.3%
15.1%
15%
14.7%
15.4%
15.4%
15.5%
15.6%
15.6%
14.6%
14.4%
14.1%
14%
14.0%
13.7%
13.7%
13.3%
13.1%
13.0%
13%
12.7%
12.0%
12%
FY09
FY10
FY11
FY12
Scenario 1: 1.1% real pricing growth
Scenario 3: 0.0% real pricing growth
FY13
FY14F
FY15F
FY16F
FY17F
FY18F
FY19F
FY20F
Scenario 2: 0.5% real pricing growth
Current CS: 0.7% real pricing growth
Source: Company data, Credit Suisse estimates
Ramsay Health Care
(RHC.AX / RHC AU)
4
18 December 2013
RHC's recent ROIC history
Australian hospitals ROIC growth
We estimate that the ROIC 1 of RHC's Australian hospitals business 2 has steadily
increased since FY09, from 12.0% to 14.7% as of FY13 (see Figure 3).
Figure 3: Historical ROIC of RHC's Australian hospitals business
15.5%
15.0%
14.7%
14.5%
14.1%
14.0%
13.7%
13.5%
13.1%
13.0%
12.5%
12.0%
12.0%
11.5%
11.0%
FY09
FY10
FY11
Australian hospitals ROIC
FY12
FY13
Source: Company data, Credit Suisse estimates
In our view Australian ROIC has risen due to:
■
Sustained price increases from insurers;
■
Cost reduction programs including procurement savings (direct sourcing of
consumables/capital items) and nursing mix management (i.e. proportion of
Registered Nurses to Enrolled Nurses); and
■
Brownfield developments, which management note contribute ~15% ROIC 3 years
after opening (at the latest).
To derive Australian hospitals' ROIC we have calculated:
1
2
1)
Historical Australian EBIT by deducting estimated Indonesian EBIT and estimated
corporate costs from reported Australasian figures; and
2)
Historical invested capital for Australia by deducting assets acquired in France
and the UK from total assets, as reported in RHC's financial statements since
2009.
ROIC is defined as EBIT / (working capital + gross fixed assets + gross intangibles)
Australia ex. corporate/head office costs
Ramsay Health Care
(RHC.AX / RHC AU)
5
18 December 2013
International investments have held ROIC down
We have determined the ROIC of RHC's UK and France investments by deducting the
Australian ROIC from RHC's total ROIC (we ignore Indonesia given its immateriality prior
to the Sime Darby deal struck at the end of the last period, FY13).
The difference in returns between the Australian and European businesses is stark, as
illustrated in Figure 4: ROIC of the RHC group (ex-corporate costs) has steadily risen from
11.2% to 12.9% (FY09 to FY13) solely due to an increase in the Australian business,
while the ROIC of RHC's European investments has remained flat at ~7.5%,
fluctuating between 6.3% and 8.3%.
Figure 4: ROIC of RHC vs. Australian and International businesses
16%
14%
13.1%
13.7%
14.1%
14.7%
12.0%
12%
10%
12.4%
11.2%
12.9%
7.3%
7.6%
11.4%
8%
6%
12.6%
8.3%
7.5%
6.3%
4%
2%
0%
FY09
FY10
Australian hospitals ROIC
FY11
Group hospital ROIC
FY12
FY13
International hospitals ROIC
Source: Company data, Credit Suisse estimates. Note Group hospital ROIC excludes corporate/head office
costs
With UK dynamics impacted by only slow recovery in self-pay/PMI work and France
challenged as government austerity measures filter through to hospital funding, we do not
expect ROIC in either region to noticeably improve. As such we turn our attention to the
potential for the Australian business (which contributed ~78% of Group EBIT) to continue
generating ROIC growth.
Ramsay Health Care
(RHC.AX / RHC AU)
6
18 December 2013
Can Australian ROIC growth
continue?
Using history as a guide
To answer this question we first identify the broad drivers behind recent growth in ROIC.
To break ROIC drivers down to a manageable analytical level, we look at:
■
volume;
■
price;
■
costs (more specifically the price of costs); and
■
capex / brownfields
Volume - operating theatre-driven
Volume is largely driven by the number of operating theatres in a private hospital.
Theatres are the key revenue centres in a hospital as surgical patients, which we estimate
comprise 60-65% of all RHC hospital admissions, are treated in one.
To use operating theatres as a measure of volume we must also assume that:
■
operating theatre utilisation has been constant over the historical period – we assume
they have been close to, if not fully utilised, given the rising demand in hospital
utilisation noted by insurers and a steady increase in the rate of private health
membership in Australia (from 44% in FY09 to 47% in FY13). There are likely to be a
few regional hospitals that remain less than fully utilised, but under-utilised hospitals
are in our view immaterial to RHC's total Australian hospital operations.
■
beds for medical patients (general medical, psych and rehab) have grown in line with
operating theatre additions. While surgical patients represent the majority of RHC's
Australian admissions, we estimate that medical patients are ~35-40% of the total. As
theatres are not a volume measure for these patients, this assumption is critical –
based on review of recent brownfields developments we have no reason to believe
that medical patient admissions haven't consistently grown with theatres.
Theatre additions
We estimate that RHC had ~220 theatres at the end of FY09 and 255 at the end of FY133,
implying a CAGR of 4%. We have assumed linear growth in theatre numbers over this
period to derive theatres per annum over time (we believe theatre additions trended in a
linear manner but were not absolutely linear) – see Figure 5.
Figure 5: Australian operating theatre numbers and CAGR
FY09
FY10
FY11
FY12
FY13
Australian theatre numbers
220
227
236
245
255
CAGR FY09 - FY13
4%
Source: Company data, Credit Suisse estimates
Using these metrics, volume in RHC's Australian hospitals has grown 4% per
annum since FY09. As a cross-check, private hospital episodes growth in Australia from
the end of FY09 to the end of FY13 was 3.6%4. Our estimate of 4% volume growth based
on operating theatre growth therefore seems reasonable.
3
4
Analysis of RHC public disclosures on operating theatres over the last ~5 years, and CS estimates
PHIAC
Ramsay Health Care
(RHC.AX / RHC AU)
7
18 December 2013
Price – RHC has demonstrated leverage with
insurers
As we have estimated volume growth we can solve price, or, the increase in fees from
insurers (which account for ~75% of total Australian revenues5) realised by RHC since
FY09.
Figure 6 shows our calculation of price increases that RHC has received. Australian
revenues CAGR was 7.7% over the period while volume under our operating theatre
calculations was 4.0% CAGR, implying price CAGR of RHC's funding was 3.7%.
Figure 6: Australian price CAGR calculations
Australian revenues (A$mn unless stated)
FY09
FY13
CAGR
2469.0
3325.7
7.7%
Australian volume CAGR (see Figure 5)
4.0%
Implied Australian price CAGR
3.7%
CPI/inflation CAGR
2.6%
Real Australian price CAGR
1.1%
Source: Company data, Credit Suisse estimates
Inflation over the period was 2.6%, meaning that RHC achieved real pricing CAGR of
1.1% over the FY09–FY13 period. The achievement of real pricing growth cannot be
explained by an ageing population. Indeed, as we demonstrate below, real pricing growth
due to ageing is only expected to be 0.2% per year to 2020 (as older people require higher
cost treatment per episode, the average price per episode grows with ageing). A similar
ageing shift of the population occurred between FY09 and FY13 and hence only a small
proportion of the 1.1% real pricing increase identified can be attributed to ageing.
In our view, the increase in real pricing can be somewhat attributed to RHC
leveraging its high market share, high-quality, large-scale facilities, strong doctor
relationships and blue-chip hospital locations (i.e. North Shore Private,
Greenslopes, Hollywood) to gain real pricing growth from insurers.
That said Figure 7 and Figure 8 demonstrate that market concentration in both the private
insurance and private hospital markets in Australia is relatively even. RHC, while being the
dominant private hospital operator, has a similar market share (30%) to the largest
insurers Medibank Private (27%) and BUPA (26%).
So while the quality of RHC's offering has in our view afforded it bargaining power, if the
insurance industry continues to consolidate then the real pricing growth experienced
between FY09-FY13 may not continue.
5
Credit Suisse estimate. The remaining funding is received from State Governments for PPP hospitals and
the Department of Veterans' Affairs
Ramsay Health Care
(RHC.AX / RHC AU)
8
18 December 2013
Figure 7: Private health insurer market share based on
Figure 8: Private hospital market share based on
revenue (FY12)
revenues (FY12)
Queensland Teachers,
Health Partners, 0.6%
0.5%
Other, 9%
Latrobe Health, 0.6%
CBHS Health Fund, 1% Westfund, 0.7%
Defence Health, 2% GMHBA, 2%
RHC
30%
Medibank, 27%
Other
41%
Teachers Federation
Health, 2%
AHM, 2.4%
Australian Unity, 3%
nib, 7%
HBF, 7%
HCF, 11%
Source: PHIAC, Credit Suisse estimates
BUPA, 26%
Healthe Care
Mater
3%
3% St. John of God
8%
Healthscope
15%
Source: Company data, AIHW, Credit Suisse estimates
Other reasons for real pricing growth which we considered but found either
immaterial or largely unsubstantiated are:
■
Increase in services / revenue streams generated per episode: services offered
have not materially changed – the business still receives the vast majority of revenues
for operating theatre episodes/use and/or bed accommodation.
■
Coverage of excess cost inflation: while this is undoubtedly a negotiation point used
by RHC (and other hospital operators) to justify price increases, insurers know that
RHC is able to generate efficiencies of scale and on-going cost savings through proactive management. As such, while the basis of annual price negotiations is to cover
inevitable annual increases in the cost of health provision, costs are merely a
reference point in negotiations and not the sole determinant of negotiation outcomes.
■
Acuity of procedures and day/night episode mix: the mix of less complex, lower
revenue day episodes has increased as a proportion of total episodes since FY09 in
the Australian private hospital sector – see Figure 9. As RHC represents such a large
proportion of the private hospital market we believe RHC's episodic mix suggests
downward pressure on absolute pricing rather than upward pressure / real price
growth.
As such, the actual price per specific procedure funded by insurers could be actually
higher than that implied by RHC's reported revenues; RHC has just been receiving a
lower total price because of the proportional growth of lower revenue day cases.
Therefore price increases RHC receives per episode may need to be higher in the
future if the day/night mix remains at current levels, as there is no dilutive effect from
lower revenue day-cases.
That said, the proportion of day/night cases in our timeframe of FY09 to FY13 has only
risen from 57% to 60% over 5 years, which in our view is not large enough to affect
our analysis. A change in day-procedure mix growth over our forecast period could
change the analysis. However a change would only affect valuation and ROIC if there
was a margin differential to RHC between a day case and an overnight case.
Ramsay Health Care
(RHC.AX / RHC AU)
9
18 December 2013
Figure 9: Day cases as a % of total private hospital episodes
62%
60%
58%
56%
Jun-13
Jun-12
Jun-11
Jun-10
Jun-09
Jun-08
54%
Day episodes as a % of total episodes
Source: Company data, Credit Suisse estimates
Costs – savings have led to subdued growth
As set out in Figure 10, RHC's operating cost base had a 6.9% CAGR since FY09.
Adjusted for CPI inflation and volume (as measured by operating theatres) cost-price
CAGR for RHC was 0.3% over the FY09-FY13 period, well below the real revenue price
increase CAGR of 1.1% (Figure 6).
We note that the 0.3% growth is not reflective of the underlying cost-price of each
item/service that RHC pays for; it also includes the benefits of scale (i.e. brownfield
expansion at existing facilities) as well as efficiencies and cost saving programs that RHC
has implemented that have reduced cost growth over the period.
Figure 10: Australia costs CAGR FY09 – FY13
Australia costs
FY09
FY10
FY11
FY12
FY13
-2165
-2325
-2520
-2683
-2832
7.4%
8.4%
6.4%
5.6%
Growth %
Cost CAGR
6.9%
Volume growth
4.0%
Cost-price CAGR
2.9%
CPI CAGR
2.6%
Real cost-price CAGR
0.3%
Source: Company data, Credit Suisse estimates
Indeed, EBIT margin % expansion has been significant in recent years (particularly
FY12/13) – see Figure 11 ‒ as a result of, in our view, RHC's pricing power with insurers
as well as brownfield returns, tight cost control and savings initiatives.
Ramsay Health Care
(RHC.AX / RHC AU)
10
18 December 2013
Figure 11: Australia hospitals' EBIT margin % vs. revenue and cost CAGR
10.0%
16.0%
8.9%
9.0%
8.0%
7.7%
7.0%
7.4%
7.7%
8.4%
15.0%
6.6%
6.0%
14.0%
6.4%
5.0%
5.6%
4.0%
14.8%
3.0%
14.0%
2.0%
1.0%
13.0%
12.0%
13.0%
12.3%
12.6%
0.0%
11.0%
FY09
FY10
Australia EBIT margin %
FY11
Australia revenue growth %
FY12
FY13
Australia cost growth %
Source: Company data, Credit Suisse estimates
Will subdued cost growth continue? – RHC does not disclose quantification of cost
savings programs, however we understand that procurement centralisation, direct
outsourcing and nursing mix management have been the key drivers of cost reduction in
recent years. We anticipate that these programs and savings will continue in the near-midterm, however we presume that marginal cost reduction will become harder to find over
time.
Invested capital – operating theatres are a guide
Growth capex: We estimate that an operating theatre has cost ~A$15.1mn to build
between FY09 and FY13. The figure includes all ancillary facilities to support the theatre
such as beds/wards, car parking, consultant suites and is based on the average cost of
brownfields over the last 4 years for which operating theatre expansion numbers were
disclosed (Figure 12). As an aside, we estimate the cost of just an operating theatre to be
closer to A$5-6mn.
Ramsay Health Care
(RHC.AX / RHC AU)
11
18 December 2013
Figure 12: Calculation of brownfields costs – average cost of operating theatre
Hospital
State
Details of brownfield development disclosed
Development cost
A$
25-30mn
Cost per operating
theatre A$mn
7.5
Westmead
NSW
4 OTs, +15 beds, +2 ICU beds
St George
NSW
North Shore
NSW
1 additional OT, +44 beds and consulting suites for specialists. Total
270 beds, >60 specialist consulting suites.
57 additional beds, 5 OTs, extra consulting suites, day surgery.
15-20mn
20
Pindarra
QLD
Hollywood
WA
Joondalup
WA
Greenslopes
QLD
Ipswich
QLD
1 OT + day surgery
8mn
8
Sunshine Coast
QLD
200 beds; 8 Ots, day centre, day chemo, ICU
150mn
18.8
Cairns
QLD
New OT
5.9mn
5.9
Warringal
VIC
62 new beds, 5 OTs
56mn
11.2
The Avenue
VIC
OT; day surgery
14mn
55mn
Construction of 50 inpatient beds, development of 4 OTs, construction
55mn
of consulting suite building and multi-storey car park
Additional 90 beds, 4 OTs, Consulting Suites, Carparking, Day Surgery 128mn gross 88mn
net
Agreement with WA Gov for public and private redevelopment:
85mn includes
private hospital +
shared services
58 beds; 4 OTs, obstetrics unit
47mn
Average
11
13.75
32
27.6
11.75
14
15.1
Source: Company data, Credit Suisse estimates
Cross-check: Using theatre additions as per Figure 5 (and assuming a linear growth trend
as RHC has not disclosed theatre additions each year) 9-10 theatres were added each
year between FY09 and FY13 – refer Figure 13. We have cross-checked this against the
number of theatres implied by brownfields capex (A$mn) disclosed by RHC for brownfields
projects over the period. Assuming A$15.1mn per operating theatre (as derived in Figure
13 above), we estimate that 8-11 new theatres were built each year over the period. As
such it seems that the A$15mn per theatre is a reasonably accurate measurement of
capex over recent times.
Figure 13: Cross-check of new theatres data vs. new theatres implied by brownfields
capex spend
FY09
FY10
FY11
FY12
FY13
218
227
236
245
255
No.
9
9
9
10
A$mn
120
131
132
158
No.
8
9
9
11
Australian theatre numbers
No.
New theatres (linear growth)
Historical RHC disclosure/CS estimates of Australian
Brownfield capex
New theatres implied by capex spend
Source: Company data, Credit Suisse estimates
Maintenance capex – our estimates of Australian hospitals' maintenance capex from
FY09-FY13 use the following information:
■
Management note that maintenance capex is ~70% of depreciation, with the shortfall
to depreciation due to additional brownfield developments at the same sites where
maintenance capex is deployed.
■
RHC discloses D&A for its Australian operations (ignoring Indonesia due to
immateriality) in its financial accounts.
We estimate Australian maintenance capex over the FY09-FY13 period rose from A$52mn
in FY09 to A$75mn in FY13 (Figure 14).
There is no evidence to suggest that the historical relationship between D&A and invested
capital will diverge in the future so long as RHC maintains a similar brownfields investment
pace (which we expect it will).
Ramsay Health Care
(RHC.AX / RHC AU)
12
18 December 2013
Figure 14: Maintenance capex as % of D&A
FY09
FY10
FY11
FY12
FY13
74
89.9
98.8
106.9
107.4
Australia invested capital, less D&A
2405.6
2396.8
2634.1
2996.4
3227.7
D&A as % of invested capital
-3.1%
-3.7%
-3.8%
-3.6%
-3.2%
Maintenance capex as % of D&A
70%
70%
70%
70%
70%
Estimated maintenance capex
52
63
69
75
75
Australian D&A
Source: Company data, Credit Suisse estimates
Maintenance capex has been steady between (2 and 2.5% of Australian revenues) since
FY09, while growth/brownfield capex has been ~4-5% - see Figure 15.
We note that total capex as a % of sales of 6-7% over the FY09-FY13 period has
supported volume CAGR of 4.0%. In forecasting capex we use these metrics as a crosscheck.
Figure 15: Maintenance and growth capex as % of Australian revenues
250
4.7%
4.5%
4.5%
4.5%
4.2%
200
4.0%
A$mn capex
3.4%
3.5%
150
3.0%
2.4%
100
5.0%
2.4%
2.4%
2.3%
2.5%
2.0%
2.1%
1.5%
50
1.0%
0.5%
0
0.0%
FY09
FY10
Australia growth capex
Maintenance capex as % of revenues
FY11
FY12
FY13
Australia maintenance capex
Growth capex as % of revenues
Source: Company data, Credit Suisse estimates
Ramsay Health Care
(RHC.AX / RHC AU)
13
18 December 2013
Forecasting ROIC
With the background and quantification of the drivers of RHC's recent rise in ROIC
established we turn to forecasting ROIC over the forecast period.
Our forecast is for organic growth in RHC's Australian hospitals business; that is,
revenues, costs and capex to service underlying growth in private hospital demand in
Australia. In determining organic growth we have made the following assumptions.
■
The % of the Australian population covered by private insurance remains 47.0%;
■
RHC's market share remains constant (i.e. new brownfield developments service only
organic volume growth, not market share gains);
■
Current hospital utilisation of different age groups remains consistent;
■
Funding weightings for different procedure types used by insurers are unchanged.
A change in the above assumptions would clearly lead to different outcomes. However, we
believe that the relationships between revenues, costs and investment capex would still
broadly hold. The magnitude of growth in all areas however would differ with a change in
the above assumptions. Our forecasts are for the period from FY14F to FY20F.
Organic volume growth of 2.0%
Using ABS and PHIAC data we estimate that RHC's organic Australian volume/procedure
growth will be 2.0% per year to 2020. The estimate is based on:
■
A CAGR of 1.2% in the Australian population as estimated from ABS Australian
population forecasts to 20206; and
■
A CAGR of 0.8% in volume growth due to a natural shift in the Australian population to
older patients that have a higher hospital utilisation rate than younger patients. The
CAGR estimate is based on current PHIAC hospital utilisation by age data overlaid
with the expected shift in ageing as forecast by the ABS (Figure 16, Figure 17). The
ageing impact is most clearly seen in Figure 18 which shows projected total private
hospital episodes in 2020 at the 2013 population level.
Figure 16: Australia's population expected to continue to
Figure 17: …which increases the market for private health
age…
insurance as older Australians are more likely to utilise
private insurance
16%
14%
Ageing population
16%
900,000
14%
800,000
12%
12%
10%
10%
700,000
% of population
600,000
500,000
8%
8%
400,000
6%
6%
300,000
4%
200,000
4%
2%
100,000
0%
0
2%
80–84
85+
75–79
70–74
65–69
60–64
55–59
50–54
Number of insured people
45–49
6
80+
40–44
Source: ABS, Credit Suisse estimates
70-79
35–39
2020
60-69
30–34
2010
50-59
25–29
40-49
20–24
30-39
15–19
20-29
10–14
10-19
5–9
0-9
0–4
0%
Annual private hospital episodes as % of population
Source: ABS, PHIAC, Credit Suisse estimates
Using ABS's mid-case immigration forecast
Ramsay Health Care
(RHC.AX / RHC AU)
14
18 December 2013
Figure 18: Projected private hospital episodes by age group 2013 and 2020 (with
population growth held constant)
120
thousands of private hospital episodes
100
80
60
40
20
0
0-4
5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+
2013
2020
Source: ABS, PHIAC, Credit Suisse estimates
Organic pricing growth of 0.2% via ageing mix shift
With organic volume growth of 2.0% forecast under the above assumptions, our analysis
suggests that organic revenue growth will be even higher at 2.2% due to a 0.2% natural
pricing increase due to the ageing population. The higher revenue growth rate factors the
ongoing ageing effect of pricing, whereby older private hospital patients are admitted for
episodes of higher acuity and price.
Annual fees earned by hospital operators per private episode (excluding Medicare
funding), by age, is shown in Figure 19. The average fee increases from ~A$2,600 per
episode for a 20-24 year old, to A$3,300 for a 60-64 year old, to ~A$4500 for an 85+ year
old.
Figure 19: Annual private hospital fee per episode by age group
Average private hospital fee per insured Australian (ex
Medicare benefits) A$
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
85+
80–84
75–79
70–74
65–69
60–64
55–59
50–54
45–49
40–44
35–39
30–34
25–29
20–24
15–19
10–14
5–9
0–4
Source: PHIAC, Credit Suisse estimates
Ramsay Health Care
(RHC.AX / RHC AU)
15
18 December 2013
Organic costs - growth assumes flat EBIT margin
We assume zero real cost growth, or, that the organic EBIT margin to FY20 remains
consistent with FY13. Real cost growth between FY09 and FY13 was 0.3% per annum
(Figure 10), so this assumption assumes ongoing organic cost savings. However, real cost
growth also coincided with real pricing growth of 1.1% over the same period (Figure 6) so
we believe having zero cost growth but with flat organic EBIT margins is reasonable. The
assumption is EBIT margin expansion can only occur from brownfields.
Brownfields - estimate ROIC of 15% after 3 years
Revenues/costs
Our organic revenue growth numbers are revenues to be generated by brownfields
expansion. However we model brownfields costs separately to costs of the existing RHC
business as we lack insight into the cost synergies that RHC gains via brownfields
development. Therefore in order to forecast brownfields operating costs our forecasts use
management's guidance that brownfields generate ROIC of 15% after 3 years.
This is the most contentious of our assumptions, in our view, as we have no further data
sources for support. Yet based on analysis of EBIT growth, as well as RHC's disclosure
that its brownfields program has been successful to date, we believe that brownfields
developments have on average reached this target.
In our forecasts we also include incremental EBIT added from brownfields developments
completed in the last 2 years (FY12 and FY13) that by inference were yet to reach 15%
ROIC in FY13 - we assume incremental ROIC is 5% per year until 3 years post
completion.
Growth capex
To derive the brownfields capex RHC would need to fund organic growth in Australia7, we
have:
■
calculated the number of operating theatres required to service 2.0% organic volume
growth over the next 5 years; and
■
multiplied this amount by the estimated A$15.1mn capex cost of a new theatre.
Refer to Figure 20. On our estimates, RHC needs to spend A$77mn to A$87mn per year
(in real terms) between FY14F and FY20F to fund organic volume demand in Australia.
Figure 20: Estimated capex required to service organic growth (%)
Number of OTs
no.
Growth
%
Number of OTs required
FY13
FY14F
FY15F
FY16F
FY17F
FY18F
FY19F
255
260
265
271
276
282
287
FY20F
293
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
no.
5
5
5
5
6
6
6
Cost per OT (real)
A$mn
15.1
15.1
15.1
15.1
15.1
15.1
15.1
Growth capex required for organic demand
A$mn
77.0
78.6
80.1
81.7
83.4
85.0
86.7
Source: Company data, Credit Suisse estimates
7
We assume any greenfields developments take market share rather than meet organic growth
requirements
Ramsay Health Care
(RHC.AX / RHC AU)
16
18 December 2013
Maintenance capex
Consistent with recent historical requirements we assume maintenance capex is 2.5% of
invested capital, resulting in expected maintenance capex forecasts as set out in Figure
21. Note that our definition of invested capital is current capital invested plus growth capex
required to service organic growth.
Figure 21: Maintenance capex forecasts
FY13
FY14F
FY15F
FY16F
FY17F
FY18F
FY19F
Australian invested capital
3352
3517
3688
3865
4048
4237
4433
4635
Estimated % of invested capital
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
84
88
92
97
101
106
111
116
Maintenance capex
FY20F
Source: Company data, Credit Suisse estimates
Implied future ROIC
Using the inputs/assumptions above we derive forecast organic ROIC - see Figure 22 –
with ROIC declining from 14.7% in FY13 to 12.7% in FY20F.
Figure 22: Organic ROIC forecasts to FY20F of RHC's Australian hospitals business
15%
14.7%
14.6%
15%
14.4%
14.1%
14.0%
Australia ROIC
14%
13.7%
13.7%
14%
13.3%
13.1%
13.0%
13%
12.7%
13%
Forecast ->
12%
FY10
FY11
FY12
FY13
FY14F
FY15F
FY16F
FY17F
FY18F
FY19F
FY20F
Source: Company data, Credit Suisse estimates
If RHC simply services organic growth in the Australian market, then its Australian ROIC
will decline, based on assumptions outlined above.
In our view RHC needs to either:
1)
sustain real price increases from funders above the 0.2% natural rate it should
receive from population ageing; or
2)
lower real costs, which, despite successful cost saving programs since FY09, it
has yet to achieve (0.3% real cost-price CAGR since FY09).
As in our view material further cost reductions will be harder to find in the future than in the
FY09-FY13 period RHC will need to rely on continued real pricing growth in its funding
from insurers (and other payers such as DVA/State Governments) to maintain or increase
Australian hospitals ROIC.
Ramsay Health Care
(RHC.AX / RHC AU)
17
18 December 2013
Scenarios and sensitivity
Given the importance of real pricing growth to RHC's ROIC we assess future ROIC
outcomes and RHC equity valuation sensitivity to various real price growth outcomes
below.
Scenarios
■
Current forecast – our current forecasts assume real revenue pricing growth of 0.7%
CAGR until FY23F resulting in growth in Australian hospitals ROIC from 14.7% to
16.8% by FY20F. This is back-solved from our current earnings forecasts (we do not
specifically model real pricing growth).
■
Scenario 1 – Real price growth of 1.1% attained in FY09-FY13 continues
(assumes RHC maintains its pricing power and leverage over private insurers). Under
this scenario RHC achieves substantial ROIC growth, with Australian ROIC rising to
18.6% in FY20F from 14.7% in FY13.
■
Scenario 2 – Real price growth of 0.5% CAGR – Australian ROIC growth increases
each year but at a mild rate, increasing from 14.7% in FY13 to 15.6% in FY20F.
■
Scenario 3 – Real price growth of 0.0% CAGR – Australian ROIC declines to 12.7%
by FY20F.
Assuming organic brownfields/volume growth assumptions as per Figure 20 hold
(excluding the assumption focussed on by the scenario), ROIC under each scenario is set
out in Figure 23.
Figure 23: Historical ROIC and forecast ROIC under various price CAGR scenarios
19%
18.6%
Forecast ->
18.2%
18%
17.7%
17.2%
17%
16.8%
16.7%
Australia ROIC
16.2%
16.1%
16.4%
16.6%
15.9%
16%
15.5%
15.3%
15.1%
15%
14.7%
15.7%
15.3%
15.4%
15.4%
15.5%
15.6%
15.6%
14.6%
14.4%
14.1%
14%
14.0%
13.7%
13.7%
13.3%
13.1%
13.0%
13%
12.7%
12.0%
12%
FY09
FY10
FY11
FY12
Scenario 1: 1.1% real pricing growth
Scenario 3: 0.0% real pricing growth
FY13
FY14F
FY15F
FY16F
FY17F
FY18F
FY19F
FY20F
Scenario 2: 0.5% real pricing growth
Current CS: 0.7% real pricing growth
Source: Company data, Credit Suisse estimates
Clearly the long-term pricing that RHC receives from insurers will have a dramatic effect
on returns.
Ramsay Health Care
(RHC.AX / RHC AU)
18
18 December 2013
Valuation scenarios
Our current valuation of A$41.50 per share assumes 0.7% real pricing CAGR over the
next 10 years.
■
Using a 1.1% real price CAGR as per Scenario 1, our RHC valuation rises to A$46.50,
12% above our current target price.
■
0.0% real price CAGR (Scenario 3) gives a valuation of A$32.20, 22% below our
current share price.
Refer Figure 24
Figure 24: RHC valuations under Australian hospitals real pricing CAGR scenarios
50
A$p/share
45
12%
40
-22%
46.50
35
41.50
30
32.20
25
1.1% real price CAGR
0.7% real price CAGR - CURRENT CS
0.0% real price CAGR
Source: Company data, Credit Suisse estimates
Sensitivity
Using parameters as described above we estimate that a 0.1% change in real pricing
CAGR over the next 10 years translates into a 3.1% change in the valuation of RHC
shares.
Brownfields scenario
In our opinion the assumption carrying the most risk in our forecasts is that of brownfields
ROIC. While RHC states that it achieves 15% ROIC on brownfields after 3 years, we
believe this is just a business case target and brownfields may generate higher returns.
We assess the ROIC outlook for RHC under the scenarios above, but adjust brownfields
ROIC to 20% after 3 years rather than 15% in the future.
Over a 7 year period (to FY20F) ROIC of the RHC group would increase by 0.5% therefore the impact is not that significant on the company (see Figure 25).
The valuation uplift is 4.0%.
Ramsay Health Care
(RHC.AX / RHC AU)
19
18 December 2013
Figure 25: Impact on RHC group ROIC of increasing Australian brownfields projected
ROIC from 15% to 20%
20%
Australia hospitals ROIC - Brownfields 15% ROIC (dashed), 20% ROIC
(solid)
Forecast ->
19.1%
19%
18.5%
18.0%
18%
17.5%
16.9%
17%
16.3%
16%
15.5%
15.3%
15%
14.7%
15.1%
15.8%
15.9%
16.1%
14.4%
14.2%
14.1%
14%
15.5%
15.7%
13.9%
13.7%
13.6%
13.4%
13.2%
13.1%
13%
12.0%
12%
FY09
FY10
FY11
FY12
FY13
FY14F
FY15F
FY16F
FY17F
FY18F
FY19F
FY20F
Source: Company data, Credit Suisse estimates
Ramsay Health Care
(RHC.AX / RHC AU)
20
18 December 2013
Appendix
Figure 26: Data for volume, price and mix growth 2013 - 2020
2013
Age group
Population Episodes
2020
mn
no.
A$
Revenues (ex
Medicare)
A$mn
mn
no.
A$
Revenues (ex
Medicare)
A$mn
0-4
1523
23723
2424
58
1662
25888
2901
75
5-9
1444
10252
1704
17
1645
11679
1704
20
10-14
1416
8556
2157
18
1576
9523
2157
21
15-19
1502
19592
2593
51
1505
19631
2593
51
20-24
1636
22111
2657
59
1602
21651
2657
58
25-29
1684
24646
3306
81
1714
25085
3306
83
30-34
1595.5
39409
3441
136
1802
44510
3441
153
35-39
1593.5
44417
3140
139
1745
48640
3140
153
40-44
1607.5
44922
2798
126
1600
44712
2798
125
45-49
1574.5
50112
2816
141
1703
54202
2816
153
50-54
1529.5
63837
2884
184
1565
65319
2884
188
55-59
1386
76275
3088
236
1569
86346
3088
267
60-64
1259
92325
3306
305
1419
104058
3306
344
65-69
1043
90052
3517
317
1236
106716
3517
375
70-74
773
82151
3740
307
1108
117753
3740
440
75-79
583.5
74612
3733
279
755
96542
3733
360
80-84
446
63148
3934
248
511
72351
3934
285
85+
436.5
40153
4550
183
523
48110
4550
Total
23033
870293
2885
25240
1002716
3369
1.3%
2.0%
2.2%
CAGR, 2013 - 2020
Price
Population Episodes
Price
219
Source: ABS, PHIAC, Credit Suisse estimates
Ramsay Health Care
(RHC.AX / RHC AU)
21
18 December 2013
Reference Appendix
Our new “Total return forecast in perspective” chart helps visualize Credit Suisse and consensus views of a company’s 12-month return within the
context of forecasting risks and its historical trading pattern:
12mth Volatility is calculated as the annualised standard deviation of weekly total return series over the past 12 months. It illustrates variability of
stock returns; in other words, risk. The way to think about it is that one would rather take 10% forecast return from a stock that has 20% volatility,
than from the stock that has 40% volatility. The shaded area shows the one standard deviation range based on past 12 months volatility. In statistical
terms, once you make a number of brave assumptions, there is a 68% probability that the share price will end up inside that range in 12 months time.
52wk Hi-Lo is maximum and minimum daily closing price over the past 52 weeks. It is often handy to know the price momentum especially when the
stock is trading close to its highs and lows: Is the stock
trading close to its peak? Is the momentum against the stock?
*Consensus is IBES consensus supplied by Thomson Reuters. IBES is a survey of sell side research analysts, collecting a few dozen data
points such as EPS, DPS, Sales, Target Price, ROE and so on. *Mean is the average of target returns, while the shaded area around the mean
represents the range of estimates from the lowest to the highest estimate. This aids visualisation of a number of important factors such as: the range
of analyst estimates; where Credit Suisse’s estimates on this stock sit relative to consensus; and where the share price is relative to consensus
mean and consensus range target.
Target return is calculated as capital gain plus forecast dividend yield (net) over the next 12 months. For “CS tgt” we have used Credit Suisse’s
target price and Credit Suisse forecast for 12-month forward dividend, grossed up for franking. For the consensus mean and range, we have used
consensus target price and consensus dividend forecasts for 12 month forward.
Ramsay Health Care
(RHC.AX / RHC AU)
22
18 December 2013
Companies Mentioned (Price as of 18-Dec-2013)
Ramsay Health Care (RHC.AX, A$41.61, NEUTRAL, TP A$41.5)
Disclosure Appendix
Important Global Disclosures
Saul Hadassin and William Dunlop, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Ramsay Health Care (RHC.AX)
RHC.AX
Date
21-Dec-10
04-Apr-11
06-Jul-11
25-Aug-11
24-Feb-12
16-Aug-12
23-Aug-12
26-Feb-13
08-Apr-13
29-Aug-13
02-Dec-13
Closing Price
(A$)
17.38
18.85
17.81
17.52
18.16
23.44
23.74
30.89
32.34
36.00
39.15
Target Price
(A$)
19.50
20.40
19.75
19.75
20.30
24.60
25.00
32.90
34.50
38.00
41.50
Rating
N
O
N
N EU T RA L
O U T PERFO RM
* Asterisk signifies initiation or assumption of coverage.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's covera ge universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the mo st attractive, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings
are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Austr alia, New Zealand are, and prior to 2nd
October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a
stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total
return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and
7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were
based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or
valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Ramsay Health Care
(RHC.AX / RHC AU)
23
18 December 2013
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy*
42%
(54% banking clients)
Neutral/Hold*
40%
(50% banking clients)
Underperform/Sell*
15%
(42% banking clients)
Restricted
3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underp erform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings a re determined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
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Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer
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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot
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Price Target: (12 months) for Ramsay Health Care (RHC.AX)
Method: Our 12-month forward target price of $41.50 for RHC.AX has been derived using a discounted cash flow (DCF) methodology, utilising a
risk-free rate of 4.5%, beta of 0.80 terminal growth rate of 2.2% and an equity risk premium of 6%.
Risk:
Risks to our 12-month forward target price of $41.50 for RHC.AX include delays or failure to execute upon brownfield development
opportunities, regulatory changes that may affect levels of private health insurance coverage, failure to reach satisfactory commercial
relationships with a key private health insurance funds, and greater than expected labour cost inflation. There are also risks associated
wtih expansion into the UK including successful bedding down of the Capio acquisition and potential for the NHS to cut back on
outsourcing contracts.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the
target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (RHC.AX) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit
Suisse.
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (RHC.AX) within the next 3
months.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (RHC.AX) within the past 12
months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;
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Ramsay Health Care
(RHC.AX / RHC AU)
24
18 December 2013
NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
research analyst account.
Credit Suisse Equities (Australia) Limited .....................................................................................................Saul Hadassin ; William Dunlop, CFA
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
Ramsay Health Care
(RHC.AX / RHC AU)
25
18 December 2013
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Ramsay Health Care
(RHC.AX / RHC AU)
Ramsay Health Care 2013 12 18 - Price sensitive.doc
26