Has the Ramsay Health Care Limited (ASX:RHC) share price fallen far enough for it to be a buy?


The Ramsay Health Care Limited (ASX:RHC) share price has fallen again in Tuesday morning ASX trade, losing $1.89 or 3.2 per cent to $58.01.

It has been some fall from grace for this former share market darling, with RHC shares now down 24 per cent from their 52 week high.


Source: The Capital Club

In late February, Ramsay Health Care reported first half group revenue rose by a modest 3 per cent to $4.4 billion, with earnings per share growing by 7.8 per cent to 139 cents. Ramsay paid a fully franked interim dividend of 57.5 cents, an 8.5 per cent increase.

At the time, Ramsay Health Care Managing Director Craig McNally said despite ongoing challenges in the operating environment in Europe, Ramsay achieved a solid first half result driven by a strong performance in its Australian business.

Looking forward, Mr McNally reaffirmed Ramsay’s FY18 Core EPS growth of 8 to 10 per cent.

Attractive demographics

Ramsay Health Care shares have long been a favourite of ASX investors due to its exposure to the attractive demographics of an ageing population.

Mr McNally commented in the half yearly results, saying “We operate in a sector that will continue to have enormous upside for many years to come. In all regions, health spending is rising as populations grow and age, technologies improve and patients become better informed. Demand for health care is rising…”

RHC shares have long traded on a significant premium to the market. As the Ramsay share price falls, that premium is slowly being eroded, with RHC shares now trading on a forward P/E ratio of 20 times earnings and a forward fully franked dividend yield of 2.5 per cent.

In March, broker Citigroup upgraded Ramsay Healthcare Limited shares to a buy, saying the stock was at its most attractive valuation in five years. The broker lifted its share price target from $74.50 to $78.50.

“Extremely attractive”

With the RHC share price now trading below $58, the 35 per cent upside to the Citigroup share price target looks extremely attractive.

Rather than comparing relative valuations, I can’t help but to compare the Ramsay P/E of 20 times earnings with its most recent group revenue growth of just 3 per cent.

That Ramsay can increase earnings by more than revenue is a positive, and Ramsay’s management might still be able to squeeze more profits out of the business.

But Ramsay needs to start moving the top line. And the company is not resting on its laurels, being set to open $147 million worth of brownfield developments in the second half of FY18 and $156 million in the first half of FY19.

Small potatoes

But for a company Ramsay’s size — full year revenues are $8.3 billion — it’s small potatoes. Ramsay needs big pumpkins to jump revenues to the next level.

Mr McNally knows it, saying in February that in addition to its brownfield development pipeline, Ramsay remain acquisitive and are “actively investigating opportunities across all markets.”

Could a big acquisition be around the corner? Watch this space.

At around $58, Ramsay shares are starting to look interesting. They’d look more so at 18 times forecast earnings, or around $52.

When the Ramsay Health Care share price was riding high at $76, it would have been hard to imagine they could fall so far.

Could Ramsay shares fall as low as $52? Never say never. 

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au