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Ramsay out, Macquarie in for global equity best ideas

Emma Rapaport  |  06 Nov 2018Text size  Decrease  Increase  |  
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Macquarie Group Building Sydney Barangaroo

Global financial group Macquarie Group has replaced Ramsay Health Care in the  Morningstar Australia and New Zealand monthly Best Stock Ideas list  on concerns about the private healthcare provider's long-term growth outlook.

While analysts continue to believe the RHC's (ASX: RHC) shares are undervalued, they have become increasingly worried about weaker long-term earnings growth because of challenging regulatory environments in Ramsay’s main markets in Australia, France, and the United Kingdom.

"We believe a larger margin of safety is now warranted," the authors of the November update wrote.

Additionally, they believe the eagerness with which the Ramsay acquired Swedish hospital operator Capio points to revenue growth challenges in other areas of the group.

Analysts also have growing concerns about the balance sheet.

"Although Ramsay’s balance sheet is in reasonable shape, it is vulnerable to a deterioration in earnings, given sizable operating lease obligations," the report said.

"Net debt was $3.2 billion at June 30 on a fully consolidated basis, which implies a reasonable net debt/EBITDA ratio of 2.3 and EBIT/interest coverage of 9. However, metrics look worse on a lease-adjusted basis, with net debt/EBITDAR of 3.8 and EBITR/interest plus rent of 2.3."

Analysts expect the Capio acquisition to increase fully consolidated net debt by $1.4 billion, which will stretch the net debt/EBITDA ratio to 3.2 and reduce the EBIT/interest coverage to 7.6.

Morningstar analysts recently cut their fair value estimate for narrow-moat-rated Ramsay Health Care by 14 per cent to $65 per share following a reduction in their long-term earnings growth forecasts and the transition of coverage to a new analyst.

However, at the current market price of $55.82, they continue to believe the shares are undervalued.

Ramsay Health Care's exit from the list made way for global diversified financial services firm Macquarie Group (ASX: MQG).

Analysts say diversification and interlinking of the five businesses -- Macquarie Asset Management, Macquarie Corporate Asset and Finance, Macquarie Banking and Financial Services, Macquarie Commodities and Global Markets, and Macquarie Capital, are key to the firm generating long-term revenue growth.

"The extent of interconnectivity among the five groups and operating leverage provides attractive earnings upside that we think the market underappreciates," the report said.

"We like the firm’s growth profile, longstanding senior management, long-term investment approach, and upside from exposure to infrastructure, energy, and technology sectors."

This month also marks the end of the tenure of Nicholas Moore as CEO of group, who will make way for company stalwart Shemara Wikramanayake.

Moore, who took over from Allan Moss in 2008, is credited with steering the bank through the GFC and beyond, during which time the share price was hovering below $16.

Analysts see the interconnectedness of Macquarie's adjacent businesses as a real competitive advantage and key to continued strong growth in shareholder returns.

Additionally, analysts see the group's status as a world-leading infrastructure fund manager with increasing exposure to renewable energy as beneficial long-term.

"[Macquarie] is in a good position to benefit from huge growth in global infrastructure and energy investment in the next decade.”

Morningstar analysts recently upgraded Macquarie Group's moat rating to narrow based on the competitive advantages of Macquarie's underlying businesses.

At 11am Sydney time, the stock was trading at $121.30, below Morningstar's $130 fair value estimate. On Friday, Macquarie's stock leapt about 3 per cent after the group signalled that its full year profit would be up about 10 per cent on financial-year 2018.


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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.

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