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Ramsay Health Care hits growth headwinds

One of the high-profile corporate growth stories of the past 15 years, Ramsay Health Care, has confirmed it is entering a period of slower earnings growth as it copes with government moves to slash health care costs.

New chief executive Craig McNally admitted in an analyst briefing on Wednesday that there would be no growth in the company’s private hospital businesses in France and the United Kingdom this financial year.

Also, McNally warned about the uncertainty over health care regulation in France where new president, Emmanuel Macron, has yet to spell out his position on government funding for health care.

Ramsay is the largest private hospital operator in France.

McNally describes Ramsay’s Australian private hospital business as the earnings powerhouse of the group. He says it is on track to deliver stronger growth in 2018.

Ramsay issued earnings guidance for fiscal 2018 of 8 per cent to 10 per cent which was just below the market consensus forecasts.

Ramsay has been one of the outstanding stocks in the top 200 over the past 15 years. It was shunned by many value managers who lived to regret that decision.

Over the past 10 years the stock outperformed the market by 786 per cent. But in the last one and two year periods it has underperformed the S&P ASX200, according to Bloomberg.

McNally replaced Chris Rex as CEO of Ramsay about seven weeks ago. He told analysts the strategy that has worked so well over the past 20 years would remain.

This strategy involves taking advantage of demographic trends and the rise in chronic diseases by expanding its footprint of private hospitals through brownfield and greenfield expansion.

McNally says the company has been able to grow in Australia faster than the health care system because its scale provides diversification in case mix and reimbursement through private health insurance and Medicare.

But he warned that reform of the Australian health care system was looming because it was clear from the data that private health insurance patients were being given priority access in public hospitals.

A private health insurance patient will gain access to services in a public hospital twice as fast as a patient on Medicare.

However, reform of the system will require tough negotiations with state governments because they gain about $1.2 billion to $1.5 billion a year from private health insurers.

Ramsay’s challenges from government intervention are not confined to Australia and France. In the UK tariff cuts of 3.9 per cent have impacted upon profitability.

McNally said tariff cuts from March 2018 will be only 0.75 per cent.

The slowing in the Ramsay growth story was shown in cash conversion which in 2017 was 92 per cent compared to 102 per cent in 2016 and 103 per cent in 2015.

The difference between 92 per cent cash conversion and 100 per cent is about $100 million in earnings before interest, tax, depreciation and amortisation.

Ramsay’s earnings growth is slowing but it remains one of the best performing companies in the top 200 for the 2017 financial year with final dividend growth of 13 per cent and growth in earnings per share of 13 per cent, which was at the top end of its guidance range.

Ramsay, which was founded by Paul Ramsay, will spend about $550 million in capital this year expanding its hospital beds.

Also, it will continue expanding its Australian network of pharmacies, which are yet to make a material contribution to profits.

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