The private hospital sector is exposed to two very attractive tailwinds:
- A globally ageing population that will result in an increase in the number of patient hospitalisations
- Support from governments that are finding it increasingly more difficult to fund the ballooning costs of healthcare through the public system
Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) are Australia's two largest private hospital operators and both have significantly outperformed the broader market over the past couple of years.
Investors would probably be more familiar with Ramsay because of its impeccable and long track record but this doesn't mean Healthscope should be overlooked.
To get a better overview of both companies, here is a quick comparison of some of their key metrics:
Overview
Ramsay has a market capitalisation of $14.4 billion and operates 221 hospitals with 25,000 beds. It generates 52% of its revenues in Australia, 39% in France and the remaining 9% in Asia and the UK.
Healthscope has a market capitalisation of $4.8 billion, operates 46 hospitals, 53 medical centres and also has a New Zealand pathology division. Around 83% of the company's earnings are generated from the Australian hospitals division.
Revenue, Earnings and Dividend History
In its latest half year report, Ramsay generated revenues of $4.2 billion, up 24.9% over the previous period. Core earnings per share increased by 16.9% and this was consistent with the company's impressive long term growth rate of 16.8%, as highlighted below.
Ramsay was also able to increase its interim dividend by 16% to 47 cents per share (fully franked), in line with its long term growth rate of 16.6%.
Healthscope has only been listed in its current structure since 2014, so it is more difficult to get an accurate picture of its long term performance.
As the graph below shows, Healthscope has only recorded three halves of earnings with the most recent result showing revenue growth of 5.5% to $1.15 billion and earnings per share growth of 14.6%.
The company increased its dividend by 6% to 3.5 cents per share, although this was unfranked.
Operating Margins
Comparing operating margins from their most recent results, Healthscope comes out on top with an EBIT margin of 13.9% compared to Ramsay's margin of 10.2%.
Balance Sheet
Both companies carry a significant level of debt which is needed to fund the high levels of capital expenditure required to build and maintain hospitals.
This balance sheet risk is offset somewhat by the fact that both companies generate high levels of operational cash flows which provides a nice cushion to manage those debt levels.
In the case of Ramsay, it has a net debt of around $3.2 billion and a net-debt to equity ratio of around 166%.
Healthscope has a net debt of around $1.1 billion and a net-debt to equity ratio of around 48%.
Development Pipeline
Both hospital operators have healthy project pipelines that should be converted into future earnings growth.
Ramsay will look to add an additional 310 beds and 12 operating theatres over the next 12 months, while Healthscope has plans to add 163 beds and 9 operating theatres by the end of FY16.
Outlook
Ramsay recently upgrade its full year profit guidance and expects to deliver core EPS growth of 15%-17% for FY16.
Healthscope has not provided any firm earnings guidance for the remainder of FY16, but has noted that it expects ongoing improvements throughout the year and for accelerated growth in FY17 and beyond.
Valuation
Ramsay is currently trading on a price-to-earnings (P/E) ratio of around 30 and a dividend yield of 1.6%.
Healthscope is currently trading on a P/E ratio of 24 and a dividend yield (unfranked) of 2.6%.
Foolish takeaway
Both companies have exciting futures ahead of them but this looks to be suitably priced in the current valuation of both companies.
While Ramsay remains my preferred company in the sector thanks to its exposure offshore and long term record, I don't think investors should overlook Healthscope especially if its shares become cheaper from here.
