MENU

Ramsay Health Care Limited: What I’d pay for the shares

Ramsay Health Care Limited (ASX: RHC) is a global hospital group operating 235 hospitals, day surgery centres, treatment facilities, rehabilitation and psychiatric units and a nursing college across Australia, France, the United Kingdom, Italy, Indonesia and Malaysia. It is one of the top five private hospital operators in the world.

Shares of Ramsay currently trade at $61.43 – a decrease of 11.5% over the previous twelve months. The 52 week high is $76.18, and the 52 week low is $61.06. With earnings per share of $2.36 in 2017, shares are currently trading at a price to earnings ratio of 26.1 based on 2017 earnings. Analysts have forecasted earnings of $2.86 per share in 2018, an increase of 21% on the previous 12 months. This puts the current share price at a price to earnings ratio of 21.4 based on forecasted 2018 earnings.

In the last 10 years, Ramsay has grown its book value at an annualised rate of 8.9%. The current price to book ratio is 5.5. Over the same period, Ramsay has grown earnings at an annualised rate of 16.3%, and its cash flow at 18.1%.

Over its last 5 financial reports, Ramsay’s return on invested capital has ranged from 19.7% to 25.1%, and has averaged 21.8%. This represents a relatively strong return over that period.

In 2017, Ramsay paid a fully franked dividend of $1.345.

So what are the shares worth?

According to its 2017 financial report, Ramsay held $3.26 billion in interest bearing debt, and $419.5 million in cash and equivalents. At a current market cap of $12.55 billion, Ramsay’s enterprise value is around $15.4 billion. With earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.26 billion, the company’s enterprise multiple is around 12.25. An enterprise multiple of 10 would be a fair to cheap price to pay, and this would necessitate a market capitalisation of around 9.7 billion, and a share price of $48.12.

A discounted cash flow model using the historical growth rate in book value as the growth rate for the next 10 years and then a 2% growth rate thereafter, capital expenditures equal to those in 2017, and a required return of 10% per year places the intrinsic value of the shares around $78.00.  This is, of course, heavily dependent upon the growth rate and your required return. A required return of 15% would place the intrinsic value at around $55.50.

FOOLISH TAKEAWAY.

Based on the above, and in consideration of the tailwinds in the form of an ageing population, shares are probably worth somewhere between $48.00 and $56.00, less any margin of safety that you desire. However, the calculation of intrinsic value is not an exact science and is dependent on many factors. Given the historical growth in book value and returns on invested capital, I’d be happy to buy the shares at around $50.00.

3 Revolutionary Tech Companies to Buy In April

We're living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That's why at The Motley Fool we've been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We've found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Stewart Vella owns shares of Ramsay Health Care Limited. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.