Ramsey is a global hospital group operating 223 hospitals and day surgery facilities across Australia, the U.K., France, Indonesia and Malaysia. It is also the largest and most diversified operator of hospitals in the Australian private sector. Scale of Ramsay’s operations in the Australian context underpins, in our opinion, a sustainable competitive advantage which drives both cost advantage and a reasonable level of pricing power in negotiations with private health insurers. Unlike the United States, the Australian healthcare system relies on a unique blend of public and private service, most evident in the symbiotic relationship between private hospital operators and the private health insurance industry.
Beyond the relatively benign reforms of prosthesis pricing recently, we believe government policies designed to support private health insurance membership, combined with current inefficiencies of the public hospital system, protect private hospitals from major funding related disruptions. Furthermore, we regard hospital cover as a core component of health insurance policies and given its large and geographically diversified catchment area, Ramsay is well positioned to negotiate attractive commercial terms.
We believe its deep pipeline of brownfield projects and recent move into community pharmacy bodes well for earnings growth over the medium to long term. We also think Ramsay's centralised procurement strategy leveraging global purchasing power of the group bodes well for margin expansion.
A cautious trading update from peer Healthscope has led to a sell-off in Ramsay shares, which we think is unjustified, with low levels persisting despite reiteration of full year guidance by management. At the current discount to our fair value estimate, we regard the stock as significantly undervalued.
Current Price $68.37 AUD
Target Price $87.00 AUD
Upside Potential 27.24%
5 Year chart