Unexpected Decline in Ramsay’s Australia Margin, Reduce FVE to AUD 63

The decline in underlying margin in the first half in Ramsay’s Australian operations came as a surprise. This segment contributes approximately 80% of our fair value estimate and based on moderating our outlook for longer-term margins in Australia we reduce our fair value estimate to AUD 63 from AUD 67. The lower margin is a function of increased prosthesis costs, which is a pass-through no margin item for the hospital, and delays in concluding a fee increase with Medibank. We expect the technology-driven prosthesis element to persist. However, our narrow moat for Ramsay is based on negotiating power that it has with private health insurers, and we anticipate Ramsay to be successful in securing fee increases, leading to moderate margin improvement going forward.