Ramsay Health Care Limited (ASX: RHC) has risen by 763% in the last decade. This means that it has a P/E ratio of 36.4. Although this is in-line with healthcare sector peers such as CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH), which have P/Es of 33.3 and 41.7 respectively, it is more than double the ASX?s rating of 17.9. This may lead some investors to question Ramsay?s appeal. However, I believe that its growth opportunities and financial standing make it a buy rather than a sell.
A key part of Ramsay?s growth strategy will be a rollout…
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Ramsay Health Care Limited (ASX: RHC) has risen by 763% in the last decade. This means that it has a P/E ratio of 36.4. Although this is in-line with healthcare sector peers such as CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH), which have P/Es of 33.3 and 41.7 respectively, it is more than double the ASX’s rating of 17.9. This may lead some investors to question Ramsay’s appeal. However, I believe that its growth opportunities and financial standing make it a buy rather than a sell.
A key part of Ramsay’s growth strategy will be a rollout of pharmacies. Although it already has over 200 pharmacy dispensaries operating across its global hospital portfolio, they are currently located within its hospitals. Ramsay will establish strategically located community pharmacies in locations close to its hospitals across Australia and if successful, there is scope to rollout pharmacies internationally.
Ramsay could gain a foothold in the pharmacy space because of product differentiation as well as a degree of customer loyalty. In terms of the former, Ramsay will provide 24/7 medicine on-call advice as well as specialised medication management. Its pharmacies will have the potential to act as post-discharge services for Ramsay hospital patients, which may lead to improved customer loyalty versus its peers and the scope for higher margins.
Although Ramsay stated in its results that China remains an appealing market, in my view its international growth strategy will be focused on Europe. That’s partly because of high investment multiples across Asia as well as favourable demographics in Europe. While France and the UK are not without risk due to the general election in May 2017 and Brexit respectively, both markets have a potent mix of an ageing population, a growing population, an increasing prevalence of chronic illnesses and brownfield development opportunities.
Similarly, domestic growth is likely to be strong. As well as favourable demographics, the private healthcare sector remains robust. For example, 47% of Australians have hospital treatment insurance and the brownfield development pipeline is robust. In fact, Ramsay has over $200 million of future developments and they will be focused on the Australian market.
Ramsay’s increase in dividends of 19% may be viewed as an inefficient use of capital by some investors. That’s because it could be reinvested for future growth opportunities or in M&A activity. However, in my opinion Ramsay has sufficient cash flow to fund both of these areas. For example, dividends were $230 million in financial year 2016 and this left $164 million of free cash flow available to fund growth opportunities even after $510 million was spent on capital expenditure.
Alongside its plans for a rollout of pharmacies and growth opportunities in Australia and abroad, Ramsay’s cash flow shows that its share price could move higher. Earnings growth of 23% is forecast for the 2017 financial year and given its stable track record of annualised net profit growth of 16.8% over the last decade, I believe Ramsay remains a buy for the long term.
Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.