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Earnings shortfall unlikely to deter Ramsay bidders

Nicola Chand  |  02 May 2022Text size  Decrease  Increase  |  
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Softer than expected third quarter earnings at narrow-moat Ramsay Healthcare should rebound as the pandemic fades and are unlikely to dissuade its private equity and pension fund suitors.

Australia’s largest private hospital operator reported a 23% fall in earnings before interest and taxation (EBIT) compared to the previous period as it battled increasing surgery cancellations, staff shortages, elevated safety costs, and the end of pandemic-era government support.

Covid related disruptions carved $89 million out of EBIT, up from $52 million last quarter.

Morningstar analyst Shane Ponraj blamed the lingering effects of the pandemic on Ramsay’s (ASX: RHC) Australian and UK businesses but expects disruptions to ease. Short term bumps are unlikely to deter private equity outfit KKR and its consortium of big investors from their $20 billion bid for Ramsay, he says.

“While pandemic headwinds continue to weigh on Ramsay, we think these will largely be resolved in the near term and unlikely to deter KKR,” he says, noting the abolishment of covid-19 surgery restrictions for New South Wales and Victoria in February.

He maintained Morningstar’s long-run revenue growth forecast and fair value estimate. The $87.52 per share fair value reflects his view that KKR’s bid will be successful. Shares closed on Monday at $80.10.

Ramsay put the total impact of COVID disruptions for the nine months to 31st March in Australia at roughly $196.2 million, net profit after tax of $201.6 million.

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Chief executive Craig McNally said, “While the 3QFY22 has seen significant levels of disruption in the business due to high rates of COVID in the community, we are starting to see activity levels rise as surgical restrictions lift and our regions move into an endemic COVID setting”.

News broke two weeks ago that KKR had made a bid for Ramsay along with a consortium of sovereign wealth funds and local superannuation giants. The $88 per share cash proposal, acknowledged by the company on 20 April, is a 37% premium on Ramsay’s pre-offer share price of $64.35.

KKR and friends are a “sweet” deal for Ramsay shareholders

Calling KRR’s bid “well above fundamental value”, Ponraj backs the deal as beneficial to shareholders.

“At a 37% premium to the pre-offer close, we think in the absence of a superior alternative, which we think is unlikely, the offer is in the best interests of shareholders.”

The private equity group has reportedly been watching Ramsay since as far back as early 2021, as the private hospital operator’s share price hovered around 20% below its pre-pandemic high.

Signs of support from the Paul Ramsay foundation, which owns 19% of the firm, and the involvement of Australian superannuation funds like HESTA increase the likelihood of FIRB (Foreign Investment Review Board) approval, says Ponraj.

Ponraj is forecasting a fully franked special dividend of roughly $7.90 per share to distribute all available franking credits to shareholders prior to going private. This represents an additional franking credit benefit of approximately $3.40 per share for Australian tax residents.

Ramsay’s board of directors allowed the consortium to commence due diligence on a non-exclusive basis on 20 April. In addition to KKR and HESTA, the consortium includes sovereign wealth funds from the United Arab Emirates and Qatar.

is a wealth and finance journalist with Morningstar

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