Ramsay Health Care (ASX: RHC) is looking to spin off its 53% holding in Ramsay Sante, which operates private hospitals mainly in France and the Nordics, by December 2026. If implemented, shareholders will receive Australian CDIs in proportion to holdings at the demerger record date yet to be set.

Why it matters: We view the rationale as sound but likely to be broadly value-neutral, and leave our estimates unchanged. Given significant time before the demerger booklet is issued in October, there is also uncertainty whether an attractive third-party bid may surface.

  • It is still early days, with the demerger subject to board, shareholder, and regulatory approvals, but the news slightly buoyed market sentiment. Indeed, we see it simplifying Ramsay’s structure to focus on the transformation and long-term margin improvement of the core Australian business.
  • Any downside is likely to be limited as transaction costs would be one-off, and Sante already has its own board and management. Separated, the high-returning Australian business has the potential to rerate if the market ascribes it higher valuation multiples as a stand-alone.

The bottom line: We maintain our $54 fair value estimate for narrow-moat Ramsay in its current pre-demerger form. Shares are materially undervalued. We think profitability improves with higher indexation, utilization, and digital benefits, while wage pressures ease.

  • Improved rates for fiscal 2026 with all major Australian payors have been achieved, with dynamic indexation in three agreements. About 75% of our forecast, 3% average annual price growth is from modest premium rises, with the remainder from an improved payout ratio from insurers.
  • We expect Australia revenue growth to outpace cost inflation, given contracted wage rises and improved staff utilization. Based on the split of beds by state and contracted wages, we estimate average wage inflation to fall below 3.5% by fiscal 2027, from 6% in fiscal 2025.

Ramsay Health Care’s shares are undervalued, with long-term margin recovery largely intact

Ramsay’s Australian business enabled its global acquisitions, but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 25% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.

Ramsay has been willing to divest, selling the German business in fiscal 2021, and we would support further exits in countries where the firm doesn’t have critical mass. Holding a large market share within regions provides negotiating power with payers and cost advantages from scale, but we think the benefits of being a global operator are limited due to varying regulatory regimes and most costs being staffing.

The firm is investing to better position itself for long-term growth. The key areas of investment are brownfield and greenfield expansions in Australia, and digital. We are positive about the Australian development pipeline as it strengthens Ramsay’s cost advantages derived from scale, typically pays back in three to four years, and is low risk as demand in the area is already established. Ramsay is focusing on increasing its day surgery capacity as the proportion of day surgeries at Australian private hospitals has increased to roughly 67% from 62% in the last 10 years. The firm also sees opportunity for integrated care and higher-margin nonsurgical ancillary services such as rehabilitation. Ramsay is also strategic by adding doctors’ consulting rooms to hospital sites which encourages higher usage of on-site operating theaters. Relationships with referring physicians is key and Ramsay is reliant on maintaining its reputation for quality of care and modern facilities. The focus on digital is also strategic given synergies from integrating IT are relatively easy to capture.

Bulls say

  • Ramsay is entrenched as the market share leader in Australia, which contributes the bulk of group earnings and remains an attractive market, given relatively stable participation in private health insurance.
  • Ramsay is focussing on improving theater utilization, a tailwind for margins.
  • Increased investment in the Australian development pipeline and digital initiatives is strategically sound and strengthens Ramsay’s moat.

Bears say

  • Wage pressures are weighing on Ramsay’s profitability.
  • Recovery in higher-margin nonsurgical services is being protracted due to lower overall urgency.
  • Group ROICs including goodwill have significantly declined following European acquisitions and currently sit below the 7% weighted average cost of capital.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.