Chart of the Week: This ASX top pick might be overlooked
ASX top pick remains cheap as investor concerns around wage costs might be overdone.
Mentioned: Ramsay Health Care Ltd (RHC)
The week’s insights come from equity strategist Esther Holloway latest analysis of Ramsay Health Care (ASX.RHC).
Strong revenue growth and long term margin recovery
Ramsay Health Care is one of the world’s largest private healthcare providers, with over 530 sites in eight countries. The key markets in which it operates are Australia, France, the UK, and Sweden. It’s the largest private player in each of these markets except for the UK.
Higher negotiated rates with major Australian payers are supporting revenue growth. Our forecast five-year Australian revenue CAGR of 6% is driven by our forecast 3% industry price growth, based on premium increases slightly moderating and an improved payout ratio from insurers.
We see Australia EBIT margin rising to 12.5% at midcycle from 10% now as revenue outpaces labor costs, given improving mix and staff utilization. Ramsay’s case mix is shifting to higher-margin, higher-acuity surgeries, and services like rehabilitation as the population ages.
The firm continues to focus on utilization as it strategically builds new theaters at major hospitals in growth catchments. Labor availability is also improving on government initiatives and internal investment in recruiting and training programs, reducing the need for higher-cost agency staff.
Theater utilization improved 300 basis points over 2025 to above 70%, with data-based tools improving referrals and specialist rostering, signaling future operating leverage. We think this focus of new management is strategically sound.
The firm is still looking to spin off its 53% stake in Ramsay Sante, which operates private hospitals mainly in France and the Nordic region, by December 2026. We view this positively as it allows focus on the transformation and long-term margin improvement of the core Australian business.
The big picture
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 coverage of the population. According to data from the Australian Prudential Regulation Authority, approximately 46% of the Australian population has at least hospital treatment cover 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 in 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 70% from about 60% in the last 10 years. The firm also sees opportunity for integrated care and 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 are 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.
Looking ahead
We keep our $54 fair value estimate and narrow moat rating for Ramsay Health Care. We also retain its Standard Capital Allocation Morningstar Rating and Medium Morningstar Uncertainty Rating. The shares are materially undervalued at current trading levels. We are likely more optimistic than the market on profitability improving, on pricing, utilization, and digital benefits. The current dividend yield sits at 2.2% which is fully franked.
