AUSTRALIA RHC AU Price (at 06:11, 06 Aug 2015 GMT) Neutral A$66.37 Valuation A$ 64.54 - DCF (WACC 8.1%, beta 1.1, ERP 5.0%, RFR 3.8%, TGR 3.0%) 12-month target A$ 70.00 12-month TSR % +7.3 Volatility Index Low GICS sector Health Care Equipment & Services Market cap A$m 13,412 30-day avg turnover A$m 19.3 Number shares on issue m 202.1 Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E Revenue m 4,907.5 7,472.7 8,836.8 9,541.3 EBIT m 580.4 799.4 946.5 1,063.5 Reported profit m 303.8 392.6 465.9 539.9 Adjusted profit m 332.3 399.3 466.3 539.5 Gross cashflow m 524.2 743.4 890.0 990.8 CFPS 258.7 367.1 439.5 489.2 CFPS growth % 18.9 41.9 19.7 11.3 PGCFPS x 25.7 18.1 15.1 13.6 PGCFPS rel x 2.95 1.88 1.68 1.66 EPS adj 164.0 197.2 230.2 266.4 EPS adj growth % 20.6 20.3 16.8 15.7 PER adj x 40.5 33.7 28.8 24.9 PER rel x 2.54 2.02 1.83 1.78 Total DPS 85.0 101.5 118.0 136.0 Total div yield % 1.3 1.5 1.8 2.0 Franking % 100 100 100 100 ROA % 13.5 13.4 12.5 13.2 ROE % 20.5 22.4 23.5 24.1 EV/EBITDA x 21.8 15.0 12.6 11.4 Net debt/equity % 68.9 155.1 119.6 92.1 P/BV x 7.9 7.2 6.4 5.7 RHC AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2015 (all figures in AUD unless noted) 7 August 2015 Macquarie Securities (Australia) Limited France begins to bite Event RHC's French business, Ramsay Generale de Sante (GdS), reported halfyear earnings overnight: Sales of EUR 893.3m were +1.2% vs pcp EBITDA of EUR 115.7m was -5.6% vs pcp (adjusting for like-for-like land tax treatment) EBIT of EUR 61.7m was -9.7% vs pcp (adjusting for like-for-like land tax treatment) Impact Price cut in March causes sharp drop in profits: The French Government's 2.5% price cut implemented on 1st March meant that respectable volume growth of ~2.5-3.0% translated into revenue growth of only 1.2%. This was below wage and rent inflation however, meaning that EBITDA declined by - 5.6% (after adjusting for a land tax charge that now falls entirely in CY1H) and EBIT by -9.7%. Headwind may increase in 2H as price impacts across entire period: This period had 4 months exposed to the lower tariffs implemented by the French Government, meaning that the impact next period will be greater. In saying that, GdS will have had more time to implement cost-out measures to offset the impact. Result highlights the challenges of the French market: Unlike in Australia, prices in France are set centrally by the Government, which is facing considerable budgetary pressure and has not been overly collaborative with the private sector in recent times. As a result prices have been in decline in France for a number of years and, with it, the profit of private operators - as highlighted by GdS which has delivered an EBITDA CAGR of -5% since CY10. See our report France dilutes growth - 5 June 2014 for more commentary. Numbers are below our expectations for RHC's full French business: GdS accounts for ~80% of RHC's French earnings. We do not split our French forecasts between the two entities, however the -10% EBIT posted by GdS is well below the 3.5% EBITDAR we are forecasting for RHC's entire French unit. Earnings and target price revision No change Price catalyst 12-month price target: A$70.00 based on a DCF methodology. Catalyst: FY15 result released on the 27th of August. Action and recommendation Maintain Neutral: We remain positive on RHC's domestic operations (and increasingly its UK business) where it has long proven to be an exceptional operator. In France however (where RHC now derives ~30% of its EBIT), we remain more cautious on the outlook given the market structure, the current political environment and fact that the recent price cut will not be cycled for another 8 months. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Fig 1 (RHC AU) Profit & Loss 30 Jun 1H/14A 2H/14A 1H/15A 2H/15E 1H/16E 2H/16E 1H/17E 2H/17E 2014A 2015E 2016E 2017E Sales Australian and Indonesian hospitals $m 1872.0 1877.4 2037.4 2030.7 2190.2 2183.0 2354.5 2346.7 3749.4 4068.1 4373.2 4701.2 UK hospitals $m 312.6 366.7 353.2 422.0 422.7 502.0 482.9 511.6 679.3 775.3 924.7 994.5 French hospitals $m 175.5 303.3 950.6 1678.8 1663.7 1875.2 1901.8 1943.8 478.8 2629.4 3538.9 3845.6 Other $m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sales Revenue $m 236 2547.4 3341.2 4131.5 4276.6 4560.2 4739.1 4802.2 4907.5 7472.7 8836.8 9541.3 Sales Growth 17.6% 52.3% 18.3% 8.0% + Other Revenue $m 1.1 0.9 2.1 3.5 3.3 5.5 6.5 5.1 2.1 5.6 8.7 11.6 Total Revenue $m 2361.2 2548.3 3343.3 4135.0 4279.8 4565.7 4745.6 4807.3 4909.5 7478.3 8845.6 9552.9 Revenue Growth % 13.9% 21.1% 41.6% 62.2% 28.0% 10.4% 10.8% 5.3% 17.5% 52.3% 18.3% 8.0% Australian and Indonesian hospitals 306.5 289.3 339.3 305.7 595.8 645.0 719.8 UK hospitals 37.5 53.4 44.1 59.7 90.9 103.8 118.7 French hospitals 17.7 39.8 121.5 217.6 57.4 339.2 460.2 EBITDA $m 361.7 382.4 504.9 583.0 643.9 654.8 722.5 711.4 744.1 1087.9 1298.7 1433.8 EBITDA Margin % 15.3% 15.0% 15.1% 14.1% 15.1% 14.4% 15.2% 14.8% 15.2% 14.6% 14.7% 15.0% D&A $m 78.8 88.1 133.4 166.7 174.5 191.2 185.5 201.9 166.9 30 365.7 387.4 EBIT (core) $m 282.9 294.3 371.5 416.3 469.4 463.6 537.0 509.5 577.2 787.8 933.1 1046.5 EBIT Margin 12.0% 11.6% 11.1% 1% 11.0% 10.2% 11.3% 10.6% 11.8% 10.5% 10.6% 11.0% - Net Interest Expense $m 35.5 39.6 55.6 74.0 77.1 74.9 73.9 75.3 75.1 129.6 152.0 149.1 Pretax Profit $m 247.4 254.7 315.9 342.3 392.3 388.7 463.1 434.2 502.1 658.2 781.0 897.3 - Tax Expense $m 76.9 73.9 108.4 118.2 135.5 134.7 160.3 150.6 150.8 226.5 27 310.9 Average Tax rate 31% 29% 34% 35% 35% 35% 35% 35% 30% 34% 35% 35% + Associate profit 1.1 2.1 6.3 5.3 6.1 7.3 8.2 8.7 3.2 11.6 13.4 - Minority Interests $m 0.0 8.3 9.4 20.9 20.5 24.2 24.3 26.2 8.3 30.3 44.7 50.5 Net Profit (core earnings) $m 171.6 174.6 204.4 208.5 242.4 237.2 286.8 266.1 346.2 412.9 479.7 552.9 + Net ISIs $m 13.8 28.6 13.1 7.2 6.9 6.9 6.5 6.5 42.4 20.3 13.7 13.0 + Net Extraordinaries $m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 CARES Dividends $m 7.1 6.8 6.8 6.7 6.7 6.7 6.7 6.7 13.9 13.5 13.4 13.4 Reported Profit $m 157.8 146.0 191.4 201.3 235.6 230.3 280.3 259.6 303.8 392.6 465.9 539.9 Adjusted Profit (core less CARES) $m 164.5 167.8 197.6 201.8 235.7 230.5 28 259.4 332.3 399.3 466.3 539.5 Gross Cashflow $m 255.2 269.0 347.2 396.1 437.4 452.6 496.6 494.2 524.2 743.4 890.0 990.8 EPS (adj g/w and abn.) 81.2 82.8 97.6 99.6 116.4 113.8 138.3 128.1 164.0 197.2 230.2 266.4 EPS Growth % 18% 24% 20% 20% 19% 19% 13% 20.6% 20.3% 16.8% 15.7% CFPS 116.7 115.5 160.4 181.7 202.5 208.1 230.0 227.9 232.3 342.1 410.6 457.9 DPS 34.0 51.0 40.5 61.0 48.0 70.0 57.0 79.0 85.0 101.5 118.0 136.0 Enterprise Value/EBITDA x 20.5 17.9 15.0 1.5 Enterprise Value/EBIT x 26.3 25.0 21.6 2.1 PE (adj) x 40.9 34.0 29.1 25.1 PGCFPS x 28.9 19.6 16.3 14.6 Yield % 1.3% 1.5% 1.8% 2.0% Franking % 100% 100% 100% 100% EFPOWA m 202.7 202.5 202.5 202.5 Cashflow Analysis EBITDA $m 361.7 382.4 504.9 583.0 643.9 654.8 722.5 711.4 744.1 1087.9 1298.7 1433.8 - Inc. in Working capital $m -9.5-45.5-6.6-40.7-75.0-15.4-34.8-3.4 54.9 47.3 90.4 38.2 - Net Interest Paid $m 43.5 29.9 76.1 55.6 74.0 77.1 74.9 73.9 73.4 131.8 151.1 148.8 - Tax Paid $m 69.2 95.0 96.6 108.4 118.2 135.5 134.7 160.3 164.2 205.0 253.6 294.9 + Other $m 0.0 0.0 0.0-7.2-6.9-6.9-6.5-6.5 0.0 7.2 13.7 13.0 Net Cash in Op Activities $m 258.5 303.0 338.7 452.5 519.8 450.8 541.2 474.2 561.5 791.3 970.6 1015.4 + Asset Sales $m 0.0 1.4 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.0 0.0 0.0 - Capex $m 86.3 159.4 284.1 176.8 216.7 231.1 244.9 238.6 245.7 460.9 447.9 483.6 - Acquisitions & Investments $m 294.7 5.0 639.4 1080.0 0.0 0.0 0.0 0.0 299.7 1719.4 0.0 0.0 + Other $m 1.1 0.9 76.4 0.0 0.0 0.0 0.0 0.0 2.1 76.4 0.0 0.0 Net cash in investing $m (379.9) (162.1) (847.2) (1,256.8) (216.7) (231.1) (244.9) (238.6) (541.9) (2,104.0) (447.9) (483.6) - Dividends Paid (before DRP) $m 90.7 75.5 212.5 88.5 130.0 103.7 148.2 121.9 166.2 301.0 233.7 270.0 + Equity Movements (inc. DRP) $m -11.1-19.5-25.3 0.0 0.0 0.0 0.0 0.0 30.6 25.3 0.0 0.0 + Debt Movements $m 71.0-2.0 895.2 1080.0 0.0 0.0 0.0 0.0 69.0 1975.2 0.0 0.0 + Other $m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net cash in financing $m (30.7) (97.0) 657.3 991.5 (130.0) (103.7) (148.2) (121.9) (127.7) 1,648.8 (233.7) (270.0) Opening cash balance $m 272.3 127.7 167.2 319.2 506.4 679.5 795.4 943.5 272.3 167.2 506.4 795.4 Net Increase in Cash $m -152.0 43.9 148.9 187.2 173.1 115.9 148.1 113.6-108.1 336.1 289.1 261.7 + Adjusting Figure (inc. net exch. diff.) $m 7.5-4.4 3.1 0.0 0.0 0.0 0.0 0.0 3.1 3.1 0.0 0.0 Cash balance $m 127.7 167.2 319.2 506.4 679.5 795.4 943.5 1057.2 167.2 506.4 795.4 1057.2 Performance analysis Balance Sheet 2014A 2015E 2016E 2017E Cash 167 506 795.4 1057.2 UK 4% France 29% FY15E EBIT breakdown % Aust & Indo 67% Source: Company data, Macquarie Research, August 2015 Current Assets 723 1,185 1234.7 1322.0 Financial assets 195 257 270.6 287.6 Fixed Assets 2,145 3,253 3323.3 3407.6 Intangibles 1,175 1,946 1958.3 1970.3 Other assets 146 231 230.6 230.6 Total Assets 4,551 7,378 7813.0 8275.2 Short Term Debt 34 343 342.7 342.7 Current Liabilities 888 1,674 1814.5 1940.0 Long Term Debt 1,334 2,873 2872.8 2872.8 Other Liabilities 551 742 759.5 775.8 Net Assets 1,744 1,746 2023.4 2343.8 Shareholders Funds 1,491 1,494 1771.3 2091.7 CARES Prefs 252 252 252.2 252.2 Total S/holder fund 1,744 1,746 2023.4 2343.8 Working Capital ($m) 160.7 453.3 543.7 581.9 ND/ND+E 41% 61% 54% 48% EBITDA Int. Cov (x) 9.9 8.4 8.5 9.6 Return on Equity 19.1% 22.9% 23.0% 23.0% Return on Assets 7.3% 5.4% 6.0% 6.5% ROFE (%) 15.8% 13.8% 15.6% 16.5% NTA (est) ($) 2.81 0.99 0.32 1.84 7 August 2015 2
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a reasonably positive view on Ramsay Health Care. The strongest style exposure is Price Momentum, indicating this stock has had strong medium to long term returns which often persist into the future. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers. 72/389 Global rank in Health Care Equip. & Services % of BUY recommendations 33% (4/12) Number of Price Target downgrades 1 Number of Price Target upgrades 2 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Health Care Equip. & Services) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 1.2 0.9 0.6 0.5 0.5 0.3-3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. -0.5 0.6 - -0.2 0.3-3.0-2.0-1.0 0.0 1.0 2.0 3.0-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Cash FY1 RNOA Return on Assets FY0 Price to Sales LTM DPS Growth FY1 Operating Margin NTM Momentum 6 Month Consensus Recommendation -15% -16% -17% Negatives Positives - 13% -20% -10% 0% 10% 20% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 0.91-0.23 2 0.22 7 0.62 0.28 5-1.39 3-0.37 Percentile relative to sector(/389) Percentile relative to market(/414) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 7 August 2015 3
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) RHC AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2015 12-month target price methodology RHC AU: A$70.00 based on a DCF methodology Company-specific disclosures: RHC AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of s's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Date Stock Code (BBG code) Recommendation Target Price 17-Mar-2015 RHC AU Neutral A$70.00 26-Feb-2015 RHC AU Neutral A$68.00 30-Jan-2015 RHC AU Neutral A$49.00 16-Jan-2015 RHC AU Neutral A$48.50 06-Jun-2014 RHC AU Neutral A$49.00 26-Feb-2014 RHC AU Outperform A$45.00 30-Aug-2013 RHC AU Outperform A$42.00 17-Jun-2013 RHC AU Neutral A$34.09 26-Feb-2013 RHC AU Neutral A$33.57 23-Aug-2012 RHC AU Neutral A$25.00 Target price risk disclosures: RHC AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 7 August 2015 4
General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 7 August 2015 5