Healthscope vs Ramsay Health Care
Healthscope (ASX: HSO) and Ramsay Health Care (ASX: RHC) hotly contested the Northern Beaches hospital tender at Sydney’s Frenchs Forest, with Healthscope emerging victorious. Should Ramsay shareholders be concerned?
While specific metrics of the contract have yet to be released, preliminary figures suggest that the Northern Beaches hospital project will cost $1 billion, which includes approximately $600 million to build the public/private hospital. It’s a major deal for the recently floated hospital operator, and management will now be tested to execute the contract profitability. Remember that with any investment, the price paid should always be below the assessed intrinsic value.
But Healthscope’s gain isn’t necessarily Ramsay’s loss.
The key value driver of Ramsay Health Care is brownfields investment rather than greenfields investment. Brownfields investment is the expansion of existing infrastructure, while greenfields investment involves building hospitals on new sites from scratch.
Ramsay has a portfolio of around 70 hospitals in Australia. Because these hospitals are located in strong catchments that are exposed to a favourable demographic shift, Ramsay is not forced to scope out new sites to achieve growth. Instead, it can increase the capacity of its existing premises as admissions grow. Ramsay also owns most of its premises, which means it doesn’t have to negotiate with landlords to optimise the layout of its hospitals (another key reason for its impressive profitability).
Ramsay management has previously mentioned that they are constantly approached to expand hospitals. The company has been approving between $150 million and $200 million in brownfields investments each year, and management has recently stated that every bit of free capital will be flowing back into these opportunities.
While the Northern Beaches may have been a nice addition to the Ramsay portfolio (at the right price of course), the loss of the tender is simply a blip in the context of a very strong investment pipeline. This point was aptly reflected in Ramsay’s share price, which fell 2 per cent on the day of the tender announcement, but subsequently recovered in quick time.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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tim clare
:
Ben,
RHC has been on my watch-list for years but seems perpetually overvalued (I imagine a side-effect of too much money chasing too few quality stocks in Australia), even during the depths of the GFC.
Firstly, what is your current valuation for RHC? And secondly, do you ever see the case for slightly overpaying for quality businesses like RHC, with the expectation that time rising earnings, dividends and valuation over time will forgive that decision?
Tim.
Roger Montgomery
:
Hi Tim,
For the very highest quality businesses, there is nothing wrong with paying premium to IV. Even in this scenario however it is vital to know what IV is estimated to be. Obviously the higher the price you pay, the lower your return. With respect to RHC, and depending on your assumptions and chosen discount rates, you can come up with a valuation range from $30 to $50.