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Why the Ramsay Health Care Limited (ASX:RHC) share price was crushed today

Shares in Ramsay Health Care Limited (ASX: RHC) plunged 8% to $57.28 on Thursday, after the company gave a disappointing update about its operations in Australia and the UK.

Ramsay announced that a review of the carrying value of UK assets, necessary to comply with accounting standards, will lead to a charge of £70 million (about $125 million) net of tax in onerous lease provisions and asset write-downs.

The charge applies to six of its UK facilities – out of 35 that Ramsay owns – with the Berkshire Independent and Ashtead hospitals accounting for 85% of the impairment.

The company specified that these are non-cash items and will have no impact on debt facilities or compliance with financial covenants. The goodwill of the UK business will also remain unaffected.

Managing Director Craig McNally said that while the last tariff adjustment by the UK National Health Service (NHS) and a public health care funding boost announced this week by Prime Minister Theresa May were good news for the company, NHS demand management strategies were weighing on patients volumes, despite the increasing number of people awaiting treatment.

As conditions in the UK are expected to remain challenging in the medium term, the company will work on improving operational efficiency and strengthening its operations with privately insured patients.

Impairments on UK assets will be excluded from the company’s FY18 core net profit after tax and won’t have an impact on dividends.

Ramsay also flagged difficulties with its Australian operations. Waning in-patient volume growth and delays in the launch of Ramsay’s pharmacy franchise induced the company to downgrade its core EPS growth forecast to 7%, compared to the previous guidance of 8% to 10%.

Given the current climate around private health insurance and affordability, this trend is expected to continue into FY19, and the company is investigating opportunities to grow through acquisition.

Based on the revised figure, the stock is currently trading at 20x FY18’s estimated core earnings, which isn’t cheap given its weakening short-term prospects.

Foolish takeway

Despite its limited impact on Ramsay’s financial performance, this update reinforces the worries for the near future that have weighed down the stock in the past year.

As demographic trends in Australia and overseas clearly point towards a progressively ageing population and increasing demand for medical treatment, I still think Ramsay is a good long-term investment, but I wouldn’t be surprised to see its share price weaken in the coming months.

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Motley Fool contributor Tommaso Autorino 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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