In the last five years, Ramsay Health Care Limited (ASX: RHC) has risen by 321%, which is 14.6 times better than the return offered by the ASX during the same time period. It even beats healthcare sector peers such as CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH), which are up by 254% and 80% respectively.
In my view, further gains are very much on the cards for Ramsay for the following three reasons.
Foreign expansion
Ramsay is already a truly global private hospital operator, with 39% of its business being in France and 9% being in the UK. However, I believe that there is expansion potential in other areas; notably emerging markets. Although its foray into China did not go to plan, with Ramsay abruptly ending the joint venture it had with Jinxin, I fully expect it to focus on China and the rest of the emerging world when it comes to growth.
In fact, Ramsay now has three hospitals in Indonesia and three in Malaysia, which gives it a foothold in the potentially lucrative Asian healthcare market. It is estimated by Deloitte that per capita spending on healthcare will increase in Asia at an annual average of 6.6% from 2015-19.
China's growth rate in per capita healthcare spending during this period is due to be 8.8% per annum, while India's is even higher at 16.1% per year. To put that in perspective, Australia's per capita healthcare spending is due to be around 4% per annum during the period.
Brownfield expansion
Of course, there is still opportunity for Ramsay within Australia. Ramsay's strong cash flow, which included 100% cash conversion in financial year 2015, means that it can invest heavily in brownfield site development. For example, Ramsay approved $197 million for new brownfields capacity expansion during the last financial year and this should see the company deliver 33 projects with 1,041 beds and 41 theatres in 2015 and 2016 combined.
Clearly, there is more scope for expansion due to an ageing population in Australia. And with Ramsay having net operating cash flow of $746 million in the 2015 financial year, investment capability for growth in Australia remains high in my view.
M&A prospects
Ramsay has a history of M&A activity and I believe that there is further scope to do this – especially in Europe. For example, Ramsay is now the largest private hospital operator in France and with it being a fragmented market, there is scope for acquisitions of varying sizes. Similarly, with Ramsay having a commanding position in the UK private hospital sector and sterling weakening by around 10% since the EU referendum last month, the potential for acquisitions there is high.
Although Ramsay's balance sheet already has total debt of $3.15 billion, I believe there is scope for further borrowing. That's because Ramsay has a diversified business model which means that further acquisitions could lift its share price over the medium term.
