Raise Ramsay’s FVE to AUD 70 on Better Margin and Free Cash Flow Outlook

We raise narrow-moat Ramsay Health Care's fair value estimate to AUD 70 from AUD 65 on the back of an improved view of long run margins and lower capital spending required to achieve organic growth rates. Ramsay’s value is derived largely from its Australian business, where an estimated 80% of revenue is earned via private health insurance, or PHI. This enables the firm to achieve high-teen operating margins, in line with global private hospital peers. This business is also the only source of moat, based on payor negotiating power-which allows the firm to achieve above-peer increases from PHI providers-and cost advantage. Conversely, in Ramsay’s other geographies the bulk of revenues are low-margin public tender contracts. Despite a lack of sustainable competitive advantages in these regions, the firm’s acquisition trail continues, which dilutes the contribution of the premium Australia business. We question the benefits of being global in this industry. While scale within a geographical market brings cost and, in Australia, payor negotiation benefits, we think geographic spread adds regulatory and process complexity.