This story features RAMSAY HEALTH CARE LIMITED. For more information SHARE THE ANALYSIS: RHC

Its latest acquisition increased Ramsay Health Care’s exposure to the high-growth mental health care segment, but the potential opportunity has largely failed to impress analysts.

-Ramsay Health acquired UK-based Elysium Healthcare for $ 1.4 billion
-The purchase gives the company a solid foothold in mental health care in a key region
-A high growth opportunity does not compensate for operational weakness and high costs

By Danielle Austin

With the $ 1.4 billion acquisition of debt-financed Elysium Healthcare in the UK, Ramsay Health Care ((RHC)) is further diversifying into the high-growth mental health segment. The purchase makes Ramsay one of the largest mental health providers in each of its key regions, and is expected to not only provide a revenue advantage, but also provide a leverage point for Ramsay to accelerate its growth. UK.

Operating 72 sites and approximately 2,000 beds to provide long-term mental health, complex care and neurology services, Elysium Healthcare has experienced strong growth in recent years, including a compound annual growth rate of 18.6% of its turnover between 2018-2020. The pandemic appears to have had little impact on Elysium’s performance, with the company’s above-market revenue growth and capacity increasing 9.5% over the past year.

The mental healthcare segment has experienced a faster growth acceleration than any other healthcare field in the UK growing 4% per year.

Missing target despite strong growth

While the purchase strengthens Ramsay’s position in a high-growth segment, the deal largely failed to thrill analysts and does little to offset weakness elsewhere.

The brokers noted that the expected short-term benefits of the purchase will be more than outweighed by the impacts of covid and local labor constraints. The purchase also does little to overcome concerns over continued high costs and a potential lack of recovery in hospital care after the pandemic.

While Ramsay Health Care estimated the purchase to be single-digit accretion to earnings per share in fiscal 23, brokers’ expectations following the acquisition announcement are significantly lower than that.

Jarden increased his target price to $ 88.00 from $ 84.00 following the acquisition and maintains a buy rating. While Jarden estimates earnings per share of 4.5% and 5.3% over the FY23 and FY24 of the purchase, the impact of operational weakness has led to a final forecast update of 2.6. % and 6.7%.

A majority of brokers have set target prices between $ 72.50 and $ 76.00. Within that mid-range group is Ord Minnett, who maintained an Accumulate rating and increased his target price to $ 75.00 from $ 74.00. Analysts noted that while their modeling saw the purchase of Elysium Healthcare generate 4% earnings per share in fiscal 23, the delayed takeover of Covid in the UK and France and the Increase in labor costs will be estimated at -8% from FY22. Taking all factors into consideration, the broker has increased the earnings per share forecast for FY23 by just 0.6 %.

Morgan Stanley, despite increasing its target price to $ 65.00 from $ 60.00, retains the lowest valuation on Ramsay in the FNArena database and an underweight rating. Although the broker has acknowledged that the acquisition is likely to have a positive impact on medium-term results, it seeks to strengthen its confidence in the sustainability of post-pandemic margins as costs remain high and insurers pay a premium. lower indexation for longer-term perspectives. To round out the lower end of the recommendations, Morgans and Wilsons also hold target prices below $ 70.00.

The FNArena broker database shows two buy, three hold and one sell or equivalent odds with a consensus target of $ 71.52.

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