Ramsay’s Revenue in Line but Margins Disappoint, Lower FVE to AUD 67

Narrow-moat Ramsay Health Care reported fiscal 2019 revenue in line with our expectations, but margins outside of Australia dragged earnings down more than we anticipated. We expected a core EBITDA margin decline of 1% from the 15.2% achieved in fiscal 2018 as a result of the acquisition of low-margin Capio in November 2018. However, margins in both Ramsay General de Sante, or RGdS, and the U.K. disappointed despite a more benign pricing environment and the group reporting a core EBITDA margin of 13.8%. We forecast further group level margin declines in fiscal 2020 given inclusion of a full year of Capio, but stable margins in the U.K. and Europe as a result of positive tariff increases. Thereafter we expect margin improvement once uncertainty of Brexit has passed and RGdS has fully integrated Capio. However, this improvement now looks lower than previously anticipated, and we reduce our fair value estimate to AUD 67 from AUD 70 based on lower margin outlook of 13.9% in fiscal 2024 from 14.6% prior and a higher tax rate, a result of the profit mix from higher rate countries.