HSO takeover offer will be huge for Ramsay, page-40

Not sure @madamswer how the demand for the hospitals is going to be accommodated. I hope we don't end up with an American style health system. I'll give you a daunting statistic, in 10yrs they'll be more over 65yr olds than under 15yr olds in Australia. This of course would seem to be a huge tailwind for RHC.

@danielpotter,

Yes, the ageing demographic in Australia is a major structural driver of RHC's long-term earnings growth.

And because of the drain on the national fiscus, governments - state and federal - will increasingly need to look to private sector capital to create healthcare capacity, as has been the trend for the past 20 years. I think that PPPs such as Ramsay's Royal North Shore Private and Healtscope's Northern Beaches Hospital will continue to be the model for the formation of hospital capacity, not just to cater for the growth in demand for hospital beds, but to replace government-run hospitals which are outdated and inefficient.

As much as the corporatisation of healthcare is an offence to the senses, there is no way around it: new hospital beds and operating theatres will be supplied by the likes of Ramsay.


"The headwinds is affordability. Membership to private healthcare is steadily dropping, its becoming unaffordable, and with the high cost of living in this neck of the woods I can't see that changing. Perhaps the government will put Medicare patients in private hospitals, and if it does that will obviously create another cost issue."

The Commonwealth government can't afford to let private health insurance lapse, because all that does is place additional burden on an already-overstrained public hospital system.

So, what will happen is that the Commonwealth government will have to continue to incentivise people to maintain their PHI membership, and this will need to be funded by additional taxes elsewhere.

Of course, there is still a great deal of waste in the system, even in the private hospital system and one of the things that I can foresee the government doing is to bring pressure to bear on the private hospital operators in order to strip out excess charging. Already there are signs of this happening with the government being petitioned by the PHI companies to commission investigations into alleged overcharging for example, in relation to prosthetics.

But while there is likely to be some low-hanging fruit that can be harvested in such an exercise, the gains will be largely one-off, before the funding pressure resumes.

But the only long-term solution in the hospital sector is for the government to continue to underwrite the private hospital sector, by making sure PHI remains viable and affordable, even if it means that subsidies the middle- and lower-income citizens are required to keep PHI affordable.


"I can't see it's share price performing in the next 10yrs as it has done in the past. Although I could be wrong. If I am wrong then it's price needs to get a move on as it's gone nowhere in the last 3yrs. With its dividend increasing 15% each year, this I think will eventually become a high yield stock that's practically bullet proof."

Not sure I agree with you in terms of your view being that RHC's prospects for the next 10yrs are inferior to the performance of the business over the past decade. I don't see anything that has changed in RHC's business model, or the underlying demand for its services. I'm therefore inclined to think that, in ten years' time, RHC's underlying earnings will be several multiples of what they are today.

You say, "it has gone nowhere in the last 3 years"; well, sure, the share price may have gone nowhere, but don't confuse share price performance with business performance: RHC's EBIT in 2015 was some $800m; this year it will probably exceed $1.0bn (25% increase) and EPS in 2015 was 196cps; this year it will be close to 280cps (>40% increase).

So, while the share price may have stagnated, the business certainly has not.

That is a reflection of a stock that 3 years ago was unambiguously overvalued (the P/E at the time was almost 30x and EV/EBITDA was in the mid teens), so the fault of making no money out of the stock if one bought three years ago is not the company's; rather, it would have been the fault of the investor for over-paying. (Bear in mind that in the preceding 3 years to 2015 the stock price went from under $20 to more $60.)

Which is a good segue into the valuation appeal (or otherwise) of the stock today.

Based on my modelling (which provides for a modest 7% EBIT growth and 9% EPS growth in FY2019), and following the significant multiple de-rating of the stock in recent years (a combination of a lower share price plus increased earnings), I think the stock is once again attractively priced, trading on a prospective EV/EBITDA multiple of ~10x.

My investment philosophy is that any time I am offered high-quality, durable, long-duration growth business, such as RHC, on single-digit EV/EBITDA multiples, I go ahead and I buy them.

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