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Why this top broker is upgrading Ramsay Health Care Limited shares to “buy”

The share price of Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) has taken a big tumble over the last two days but this is a great opportunity to load up on the stock, according to Citigroup.

The hospital operator has shed nearly $1 billion dollars in market value as its shares crashed 6.8% since it posted its disappointing first half results that showed weakness in its UK and French operations.

However, it still managed to deliver earnings growth and stuck to its full year profit guidance with core earnings per share (EPS) increasing 7.8% to $1.39 and revenue improving 3% to $4.4 billion in the six months to end December 2017.

This set Ramsay on track to meet its FY18 EPS growth guidance of between 8% and 10%.

Citigroup notes that the sell-off in the stock puts it at its most attractive valuation in five years and believes momentum will turn positive in the current half.

The broker has taken the opportunity to upgrade its recommendation on Ramsay to “buy” from “hold” and lift its price target to $78.50 from $74.50 a share.

There are four earnings growth drivers for Ramsay. The first is the earnings contribution from Australian brownfield projects (upgrading of existing facilities) in 2HFY18.

Then there is the earnings growth upside from potential acquisitions and the ramp-up of Ramsay’s pharmacy business.

Lastly, price cuts have likely hit a bottom and volumes from the National Health Service (NHS) in the UK are improving.

“Whilst both France and UK remain a drag, we expect upside to come from improved performance in Australia as Brownfields and Pharmacy Strategy deliver earnings growth in 2H18 and FY19,” said Citigroup. “Acquisitions (not in our forecasts) could also provide upside.”

Buying the stock on dips has been a very rewarding experience in the past and I don’t see why it should be any different in 2018. The hospital operator is well managed, has a strong track record and has the operational scale to continue to generate good returns for shareholders.

In spite of these positives, Ramsay’s share price has been underperforming over the past 12 months with the stock falling around 9% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up around 3.5%.

In contrast, other medical facilities operators like Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) have raced ahead.

I suspect Ramsay will be playing catch-up over the next 6 to 12 months.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited. 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 Scott Phillips.

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