Ramsay Health Care’s (ASX: RHC) first-quarter EBIT in Australia grew 6%, driven by improved revenue indexation. The firm reiterated fiscal 2026 Australia EBIT growth. Ramsay said it would also provide an update on the potential sale of its 53% holding in Ramsay Sante by February 2026. Shares rose 13%.

Why it matters: We think the market was encouraged by solid Australia EBIT growth despite lower public funding in Perth. Australia EBIT margin slightly contracted, but excluding this impact, expanded. We are not surprised and leave our full-year Australia EBIT growth forecast of 8% unchanged.

  • We forecast Australia EBIT margin improving by 10 basis points in fiscal 2026 on increasing theater utilization rates and lower procurement spending. We expect Perth profitability to also improve as new private capacity is added in February 2026, fractionalizing operational costs.
  • First-quarter theater utilization improved 100 basis points to above 70% with data-based tools improving referrals and specialist rostering. The firm also guided to the low end of Australia capital expenditure spending, with a focus on new theaters at major hospitals in growth catchments.

The bottom line: We maintain our $54 fair value estimate for narrow-moat Ramsay. Shares remain undervalued as we think profitability improves on higher indexation, utilization, and digital benefits while wage pressures ease.

  • Improved rates for fiscal 2026 with all major Australian payers 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 growth, given contracted wage growth and improved staff utilization. Based on the split of beds by state and contracted wages, we estimate average wage growth 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.

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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.