There’s only a handful of companies listed on the ASX that can boast a share price graph like this.

Ramsay Health Care – 1998 to 2016

Source: Yahoo!7 Finance, 14 March 2016

CSL is another that comes to mind, but I am struggling to think of any others with such a consistent uptrend over a period spanning almost 20 years.

Ramsay Health Care is one of the highest quality companies listed on the ASX, with an outstanding CEO in Christopher Rex. No ifs and butts about this. So sellers – sell at your peril, and investors, when do I buy?

Let’s look at this question and bring price into the equation, but first, a quick recap on the company.

The business

Ramsay Health Care is Australia’s largest operator of private hospitals, and is ranked in the top five globally. Founded by the late Paul Ramsay more than 50 years ago, it operates 221 hospitals across six countries, employing circa 60,000 people.

The Australian business is Ramsay’s largest and most profitable business unit, generating 52% of group revenue, while earning 72% of group EBIT. It is complemented by a UK business, which generates 10% of revenue, and Ramsay’s expansion into France through the recently acquired Ramsay Générale de Santé. The latter generated 37% of group revenue, but only contributed 20% of group EBIT.

Notwithstanding the challenges in increasing the contribution from the French business, Ramsay’s numbers are still very impressive. Core NPAT for the December half was up 16.2%, core earnings per share were up 16.9% – the continuation of a track record of earnings/profit growth of around 15% per annum.

In regard to growth going forward, Ramsay articulates this in terms of organic growth within its existing portfolio of hospitals; brownfield capacity expansion, such as adding wards or beds or new hospital development (eg. Cairns Private, Wollongong Private); public/private collaborations; and acquisitions. Ramsay says that it has proven it can export its management model, and that any acquisition must add long-term value to shareholders.

In conjunction with its half-year report, Ramsay upgraded its guidance for the full FY16 year. It now expects Core NPAT and Core EPS to grow by 15% to 17% (previously 12% to 14%).

Tailwinds and headwinds

Ramsay sees strong tailwinds in the demand for healthcare globally. An ageing population, increasing life expectancy, population growth, increased chronic disease burden and improvements in treatments and diagnostic methods will drive up the demand for health services.

Potential headwinds in Australia include private health insurance membership, and private health funds seeking to change the contractual relationship with private hospitals. While private health insurance membership has remained relatively static at 47.2% of the population, Ramsay would be vulnerable to a decline in membership, which could be triggered for example by a change in the Government’s rebate on private health insurance fees. With the contractual relationship between health funds and hospitals, Medibank is one fund that has flexed its muscles in the past, and it’s quite possible that they will do so again in the future.

In the UK and France, government plays a more direct role in setting hospital tariffs and due to the bourgeoning cost of health services, are keen to exert downward pressure. Only a few days ago, the French government announced a cut of 2.15% to the tariff schedule for private hospitals. In the UK, an average tariff increase of around 1% has been approved from 1 April.

Competitors

Ramsay’s main listed competitor is Healthscope (HSO). While they probably compete more in regard to new greenfield hospital developments rather than in the day-to-day provision of hospital beds (although specialists often operate in multiple hospitals), they are natural companies to compare in terms of market pricing.

Healthscope was listed on the ASX in July 2014. Despite a lot of hype about the IPO and the shares trading for a period well above their issue price, the shares have fallen back of late. They have still gained 19% from a $2.10 issue price to close Friday at $2.50 – but have not done as well as Ramsay, which over the same period has risen 35% from $46.67 to $63.25.

Although it’s largely an Australian hospital business (83% of EBITDA), Healthscope continues to trade at a considerable discount to Ramsay. According to broker forecasts compiled by FN Arena, it is trading on a multiple of 22.5 times FY16 earnings and 20.0 times FY17 earnings – compared to Ramsay’s multiples of 27.4 times FY 16 and 24.8 times FY17.

Interestingly, Ramsay grew revenue from its Australian hospitals by 7.4% in the last half year, while Healthscope could only manage a 4.5% increase.

The Brokers

The Brokers are neutral on Ramsay overall, with 3 buy, 3 hold and 2 sell recommendations. They see the stock as pretty fully valued, with the consensus target price of $66.39 only 4.9% higher than the current price. Trading on such a high multiple, the stock, in some brokers’ eyes, is priced for perfection. The following table compares Ramsay and Healthscope.

Bottom Line

Ramsay is one of those companies that should be a core part of your portfolio. There are very few companies that consistently deliver year on year profit growth of around 15% pa, have an outstanding board and management team, and have such strong tailwinds from the demographic and other factors shaping the demand for their services.

The stock is pricey, so if you don’t want to dive in now, look hard at Ramsay in bouts of market weakness. Don’t be too greedy, however.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.