The Ramsay Health Care Limited (ASX: RHC) share price may have fallen over 20% since the turn of the year, but one leading broker is tipping further declines in the coming months.
According to a note out of Goldman Sachs, it has retained its sell rating and $49.00 price target on the private hospital operator's shares after looking into its real estate options.
This price target implies potential downside of 11.5% for the Ramsay share price over the next 12 months.
What was in the note?
Last month private hospital rival Healthscope Ltd (ASX: HSO) completed the strategic review of its freehold hospital property assets and identified an opportunity to realise value from them for the benefit of its shareholders.
Healthscope plans to achieve this by establishing a new unlisted property trust which will hold the majority of its freehold hospital property assets and lease them back to Healthscope.
Many had speculated that this could be an option for Ramsay, believing it would add value and lift its share price.
Goldman believes that doing so could realise a significant amount of additional capital.
It has stated that: "Current REIT capitalisation rates suggest a range of 5.25-6.75% would be appropriate for a diversified group of Australian private hospitals. By applying these rates to RHC's portfolio and assuming a similar deal structure to that proposed by HSO we estimate that RHC could realise up to A$2.2-2.8bn of additional capital."
While this sounds very promising, the broker isn't so sure.
It has pointed out that Ramsay is not capital constrained and has encountered delays/challenges in executing its strategic growth initiatives. It doesn't believe additional financing would resolve these challenges or open up new opportunities that are not currently available.
Another negative would be earnings dilution according to the broker. It estimates that a freehold property trust would actually lead to 2% to 4% earnings per share dilution in FY 2019 through to FY 2022. Which is not something Ramsay can afford with its current growth profile.
In addition to this, it is concerned that the divestment of these assets would lead to a lower scope for debt financing, potentially stifling its growth.
It stated that: "By their nature, private hospitals tend to operate with large asset bases, upon which volume growth is reasonably secure and cash-generation is typically strong. As such, most debtholders are comfortable with leverage up to 3-4x for the larger operators and, more so than most other healthcare sectors, leverage is a critically important source of financing for hospital groups. Illustratively, the difference between 4.0x our FY19E EBITDA forecast (max of recent historical range) and 1.5x (min) is A$3.6bn."
All in all, I believe this demonstrates why spinning off its hospital assets may not be the quick fix for the share price that many expected.
As a result, I would suggest investors stay clear of Ramsay until trading conditions improve.
In the meantime, I think healthcare shares CSL Limited (ASX: CSL) and Mayne Pharma Group Ltd (ASX: MYX) could be worth a look.
