Markets: Rosy Ramsay in good health

The nation's largest hospital group has reached a resolution with Medibank Private, leaving this defensive stock nicely placed.

In what looks like a case of perfect timing, on the day of reporting earnings Ramsay Healthcare has announced they have resolved their tiff with Medibank Private.

The resolution comes in the form of a three year contract, with the terms being kept confidential. With Medibank only offering Ramsay a 2 per cent increase and the industry norm somewhere between three to four per cent, it is plausible to suspect the number is in this proximity. 

Having pushed the drama with Medibank to the wayside, Australia’s largest hospital group is back in favour with investors. Today has seen Ramsay tack on close to 4 per cent, taking the stock higher than when the Medibank drama first hit the market only two weeks ago.

The full year results posted by Ramsay, which treats a million patients a year, were convincingly impressive. Revenue was up 5.5 per cent, helping profit come in up 15 per cent at  $290.9 million. At a time when other companies are cutting costs to deliver improving profit numbers on stationary revenue, Ramsay’s result stands out. 

Earnings per share jumped 17.1 per cent, contributing to a compound annual growth rate of 17.2 per cent. Dividend growth has closely mirrored this as Ramsay has maintained around a 50 per cent payout ratio.

A coalition government would perhaps be preferable for Ramsay as they intend to strengthen the current Medicare system in a bid to take pressure off the public system. The plan is to restore the Private Health Insurance Rebate as soon as they responsibly can, however no timeline has been suggested. Medibank is facing slowing membership levels and increased scrutiny for Coalition privatisation plans.

Ramsay management have been bold enough to flag core earnings per share growth to come in between 12 and 14 per cent this financial year. This combined with the defensive nature of Ramsay’s business place them in a good position.

Our public hospital system has long been underfunded and consequently people are stumping up to pay for private health care. The affordability of it is set to continue, benefiting private operators like Ramsay along the way.

We are an ageing population, not as old as Japan but not as young as India. There is no doubt health care is going to be a significant economic contributor and Ramsay looks well placed to capitalise on this.

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