The Ramsay Journey

[Extremely Long Post Alert!
Easily bored readers should avert their eyes.]


For most investors who were actively invested in equities at the time, I suspect the GFC was a profound moment.

This “low-growth” world in which currently find ourselves, following the GFC ,is something that has probably informed my own investment thinking more than anything else over the past 3 or 4 years.

Something became clear once the mining boom started to taper here in Australia: structural organic earnings growth would be difficult to come by in the new order of things in Australia, and I suspected – just very lightly at the time – that the P/E multiple gap between companies that could grow organically, and those that couldn’t, might remain wider than had been the case historically.

Put simply, I thought there was a risk that “Deep Value” investing – which is what I was schooled in – would in the future be less successful than “Growth” investing.

So I decided to try to think more like a “Growth”, as opposed to a “Value”, investor.

I started to trawl the market for companies that provided scope for structural organic growth, irrespective of economic conditions.

Which led me to start researching Ramsay Healthcare in late 2011.

Ramsay’s track record certainly displayed the hallmarks of a company that could grow organically, irrespective of what the economy happened to be – or not be – doing at any given point in time.

For the company had already, at that stage, established an impressive operational and financial track record:

• Over the preceding decade, RHC grew Revenue, NPAT and EPS by a mouth-watering Compound Average Growth Rates (CAGRs) of 25%, 29% and 22%, respectively.
• The share price, commensurately, had risen seven-fold from a little over $2/share in mid-2001, to $17/share in 2011.

Trouble is, while I knew full well that Ramsay was a good, durable, and well-managed business the reason I had never taken Ramsay seriously as an investment opportunity was that, valuation-wise, the stock was trading on a P/E multiple of 17x.

It felt like an excessive multiple to me and my “Deep Value” DNA.
I had never before paid 17x P/E for any business.

For a while there, I thought I had missed the opportunity.

However, I kept looking at the financial model spreadsheet that I had before me and asked myself, “What if, in the next 10 years, the financial performance of the last 10 is replicated, or even if the company is half as successful, growth-wise, in the future as it has been to date?”

It is on this prospect that I bought my first Ramsay shares on 25 March 2011, paying then what seemed like a very handsome $17.04 per share.

My thinking was that I would hold the stock for 10 years, on the expectation that – even if the company only increased its underlying per share earnings by 10% -12% over the second decade – then, in a comparatively low-growth world, that would be more than sufficient to sustain the stock’s premium-to-market valuation multiple.

Today, as I approach the half-way mark of my decade long ownership period, I conduct an audit of my expectation at the time of my first purchase of stock in Ramsay thinking compared to what has transpired in reality.

In the four years I have been a shareholder in Ramsey, a period during which I am pleased to have added to my holdings on several occasions, the following financial performance has been achieved:

• At the group level, Revenue has grown from $3.65bn in FY11 to $6.92bn (expected for FY15), and
• Net Profit After Tax and EPS have doubled over that period to, respectively, $390Mand $1.92/share.

That means underlying EPS growth has averaged around 18% pa during the period of my ownership, which is substantially ahead of my expectations of 10% to 12%.

Moreover, over this 4 year period, the business has generated – cumulatively – $2.2bn in Operating Cash Flow.

Of this, some $1.1bn has been spent on capital expenditure, including expansionary capex amounting to some $700m.
In additional, over $2bn of acquisitions were made, the bulk of it in the current financial year in the form of the General de Sante in France.

Clearly there is a significant investment underway in future growth.

In terms of geographic segments, in 2011, Ramsay generated just a quarter of its Revenue and around 15% of its EBIT outside of Australia.

Today, despite Australian Revenue and EBIT having grown by almost 40% since 2011, the company now generates a full 45% of Revenues and one-third of EBIT outside of Australia.

And importantly, the Sime Darby JV, which has been somewhat dormant for some time, has made its debut positive EBIT contribution, but is probably contributing next-to-nothing at the bottom line for Ramsay..

As part of my researching of Ramsay, I recall that when Ramsay first bought into the UK hospital scene in 2007/8, no analysts who followed Ramsay at the time really wrote much about it.

Clearly – understandably, even – there was very limited understanding in the Australian broking community about the structure and dynamics of the UK hospital industry.

The result is that no analysts at the time ascribed much value to Ramsay’s UK hospital ambitions.

During the first year following their acquisition, the Ramsay UK assets generated the equivalent of $385m in Revenue and recorded EBIT of some $20m. By the time I began to look closely at the stock in 2011, Ramsay’s UK Revenues had reached over $500m, and they were making around $50m in EBIT.
This year, the UK is on track for Revenues in excess of $750m and EBIT above $70m.

France is a similar story; from is first acquisition on France in January 2011, Ramsay has grown its French business to Revenues in excess of $3.0 bn and EBIT of around $200 m. While most of this EBIT has been acquired over the past 3 years, the December half result was a further sign of the operating improvement brought to bear by Ramsay on its French portfolio, with EBITDAR margins improving by a whopping 450bp.

Again, broking analysts have been quite muted in their research about the French hospital industry and what Ramsay has been doing there.

In fact, they (like me, I concede) had been a somewhat circumspect about how a For-Profit enterprise like Ramsay can succeed in what is almost a socialist French health sector.


With Ramsay, there’s a trend; people tend to persistently under-gauge how Ramsay is faring:

• When the company was first listed as a purely Australian-focused hospital operator, no one in their wildest of dreams would have foreseen the success that has resulted (as looks set to continue) in Australia.
• When they went into the UK, everyone was, “we’ll believe they will do well we see it.” And Ramsay has, and people now – after the fact – can see it.
• Ditto for France. They were almost written off in France by followers of the stock; some of the least positive broker research on Ramsay over the preceding two or three years related to potential pitfalls in France. In fact, the very reason the stock rallied so strongly after the DH14 result was because France is exceeding all expectations.

The result is that the stock has been in perpetual upgrade mode by analysts for the past 3 or 4 years.


Which raises the all-important question about the future.

Given management’s track record of delivery, I tend to take it as a given that the Australian business will keep growing (I recall the CEO once being quoted as saying quite recently, “There isn’t a hospital in our Australian portfolio that hasn’t undergone a brownfields expansion is some form, and there isn’t one that won’t undergo some or other brownfields expansion in the future.” Fighting talk!)

And it appears there remains more structural growth opportunity in the UK with NHS hospitals being capacity constrained (not unlike our own public hospitals here in Australia) and facing all manner of expenditure escalation at a multiple of the rate of inflation, with the inevitability of the private sector having to step in the provide hospital capacity to service growing needs of an ageing population.

As for France, well I have to admit to not being too familiar with the acquisition landscape there, nor with how government funding might be constrained in the foreseeable future, but what I do know is that Ramsay has a portfolio of assets that it has owned and operated for a relatively short period of time, and while the first signs of real operational uplift were seen in the last result, it stands to reason that the efficiency lemon still has some a-squeezing to go.

And then there’s Ramsay’s JV with Sime Darby in Asia ex- China, which is some 18 months old and is barely profitable.

Had I not witnessed, first hand, the UK and France experiences, I might not have given any credit to Sime Darby’s prospects (a bit like analysts aren’t doing right now, and just like they didn’t do with the UK and France) and I certainly would not have taken remotely seriously the prospects of a meaningful business being able to be established in China (my experience is that the road is littered with the carcasses of western companies trying to carve out any sort of sustainable business in mainland China!).

And judging from the amount of management commentary it apparently received on the webcast/conference call of the company’s latest results, CEO Rex and his fellow executives clearly have China earmarked for the next frontier. The reference to the news that the Chinese state is mandating 10% of hospitals to be privately owned was something new to me (that’s if I understood it correctly).

Having stressed that I am what I would call a Commercial-Sino-Phile (that is, I have a fear not of Chinese people or Chinese culture, but of doing business in China), if I was forced to back anyone to go about it judiciously and prudently without venturing too large a dollop of shareholder capital, then the Ramsay management team would be the ones.

Based exclusively on precedent, but acknowledging that China is not France, nor is it the UK.

While I fluctuate emotionally between being excited and uncertain about the prospects of Ramsay-in-China (given Ramsay represents about 4% of my invested capital), I don’t think the market is factoring too much for any success in China (nor the rest of Asia via the Sime Darby JV, for that matter), despite the seemingly very lofty valuation multiple of 30x on a P/E basis. (The irony is not lost on me that I baulked at paying 17x P/E some years back and here I am today happily holding the stock at a valuation multiple double that!)

The difference I think, is that I can today see underlying growth from what I term “Legacy Core Ramsay” (i.e., Australian hospitals) , and “New Core Ramsay” (i.e., France and the UK), that will be enough to drive group bottom line earnings growth by 20% pa for several years to come, while “New Frontier Ramsay” (Sime Darby and China) “feel” to me to be in the same position that the UK and France were about 4 or 5 years ago, i.e., long-dated “sleepers” that no one is taking too seriously.

Which is why I bought more shares they after the result.

For while I have no idea what the share price will do in the next 12 to 18 months after its stellar run over the past few years, I do think the foundations have been laid for further 15%-plus EPS growth over the next 5 years, which translates into a doubling of the profits of the company.

If that happens, I am almost sure the share price will be somewhat higher – and not lower – than it is today.