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Why the Ramsay Health Care share price jumped 12% higher

The Ramsay Health Care Limited (ASX: RHC) share price was on form on Monday.

The private hospital operator’s shares ended the day an impressive 12% higher at $58.33.

This compares to a very positive 7% gain by the S&P/ASX 200 Index (ASX: XJO).

Why did the Ramsay share price charge higher?

As well as getting a lift from improving investor sentiment on Monday, Ramsay’s shares were given a boost by a positive broker note.

According to a note out of Goldman Sachs, the investment bank has taken its sell rating off the company’s shares and upgraded them to a neutral rating with a $52.00 price target.

Whilst its shares have now zoomed past this price target, the change of rating appears to have gone down well with investors.

Why is Goldman warming to Ramsay?

Goldman notes that as the largest private hospital operator in Australia, France, Sweden and the fourth largest in the UK, the company is experiencing a steep decline in conventional procedure volumes.

This follows moves in each of its key markets by regulators or governments to actively discourage or ban non-critical procedures.

Whilst this is bad news for the company in the near term, the broker is positive on its long term prospects.

Goldman explained: “Looking further forward, we expect this disruption to be temporary and for the majority of lost volume to be recovered.”

The broker added: “Whilst the FY20 earnings picture looks very weak, the procedure backlog is filling quickly, and we expect higher utilisation in FY21 to drive a solid recovery in volumes, with earnings further supported by a margin tailwind from accretive case-mix and compounded by high operating leverage.”

In light of this and its recent share price pullback, the broker appears comfortable with its current valuation.

Its analysts commented: “We believe that current valuation now reflects an appropriate balance of near-term challenges vs. mid-term recovery. RHC is now trading at 8.1x consensus EBITDA, -27% below its 5-year average, and -56% below the sector.”

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Motley Fool contributor James Mickleboro 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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