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Why I think Ramsay Health Care Limited is setting itself up for long-term growth

Ramsay Health Care Limited (ASX: RHC) is Australia’s largest private hospital operator and one of the largest in the world with over 200 healthcare facilities spread across several countries, mainly in Australia, France and the UK.

Its share price has fallen heavily since its all-time high of above $81 in late 2016, it’s now down to $64 even after today’s 3.4% rise.

Investors have turned sour on Ramsay with Australians struggling to keep up with the private health insurance premium rises that providers like Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF) have implemented over the last few years. A large part of the problem is that healthcare costs are continually growing and it’s getting harder for the government, private health insurance companies and policyholders to afford it.

However, I believe that Ramsay is better placed to deal with this issues compared to most other private health companies. Indeed, the company’s Australian division delivered earnings before interest and tax (EBIT) growth of 9.1% – showing that it can deliver growth even in a difficult environment.

However, for me, the key to Ramsay’s future growth is its international operations. Its UK and French segments are much smaller, even though Australia’s population is much smaller. If the international segments grow to the same size as the Australian one, then there’s a good amount of potential growth on offer.

Management are also looking to expand into another geographical area. It has tried to expand into China in the past and it could yet go there. China would be a huge opportunity because of how large the population is and how much the economy is growing over the years. Management are also looking at North America as an investment opportunity.

I’m also intrigued by Ramsay’s announcement that it will start a joint venture global supply chain business with Ascension, which is a large US healthcare organisation. Their current scale alone should provide purchasing savings, but if the JV venture can become a major US supplier it would be huge opportunity. The US healthcare system costs the American economy much more than other western countries, so there is an opportunity to reduce other business’s margins along the supply chain.

Foolish takeaway

Ramsay is currently trading at 20x FY19’s estimated, which I think is a reasonable price considering the consensus is that Ramsay can keep growing profit in the medium-term and long-term.

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Motley Fool contributor Tristan Harrison owns shares of Ramsay Health Care Limited. The Motley Fool Australia has recommended NIB Holdings Limited and 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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