Ramsay Health Care has slashed earnings guidance and flagged onerous lease provisions and asset writedowns on its UK hospitals business, following a significant downturn in National Health Service volumes, while its key local hospitals also remain challenged.
Following a review of the carrying value of its assets, Ramsay will recognise a charge of ÂŁ70 million ($125 million) net of tax, consisting of an onerous lease provision and asset write downs related to six UK sites, which were identified as requiring onerous lease provisioning and/or fixed asset impairment.
The $12.56 billion company is now tipping full-year core earnings per shareÂ growth of 7 per cent compared to prior guidance of 8 per cent to 10 per cent it flagged in February when its bottom line was hurt by major restructure at its French operations, which will include cutting jobs over three years. ConsensusÂ was sitting at 9 per cent, according to Bloomberg.
Investors were not impressed, selling down the stockÂ by $4.82, or 7.75Â per cent, to $57.35,Â its lowest level in three years.
The UK’s Berkshire Independent and Ashtead accounted for ÂŁ60 million net of tax of the provision, it said, while there is no impairment of the goodwill of the UK business.
The nation’s largest private hospitals operator said the provisions and impairments are non-cash and will have no impact on Ramsay’s debt facilities. ItÂ is not in danger of breaching debtÂ covenants.
The charge will be excluded from Ramsay’s core net profit for the full year 2018 andÂ not affect Ramsay’s final dividend, it said.
‘UK to remain challenging’
Ramsay boss Craig McNally notedÂ a small positive tariff adjustment in the UK in April was good news, but the company has been battling challenging conditions for some time due to significant downturn in NHS volumes, despite long wait lists.
“The NHS has been in difficult financial positionÂ from budget sense. The NHS budget has been reduced to about 1 per cent per annum while it has been historically beenÂ 3 to 4 per cent,” heÂ told analysts today.
Mr McNally explained there has been been a range of “demandÂ mechanisms” in place across the nation to push patients outÂ from going in hospitals.Â For example, prior to doing a hipÂ or kneeÂ surgery, it would be required that theyÂ participate in a physio program ahead of getting admitted forÂ surgery which would push patientsÂ out by sixÂ months or they might not come at all.
“There are less referrals to the private sector,” he said.Â “Our business is 75/80 per centÂ NHS. But private volumes are increasing.”
Rival UK operators Spire, BMI and HCA are experiencing volumes difficulties, he added.
“While the funding boost for the NHS announced this week by the UK Prime Minister is a positive step, we do not anticipate immediate benefits for us and expect operating conditions in the UK to remain challenging in the medium term,” Mr McNally said.
“In the meantime, we continue to focus on operational efficiency improvements in our UK business, which have included a restructure in recent months, as well as focusing our efforts on building our non-NHS business.”
Ramsay has also experienced weaker growthÂ in procedural work and inpatient admissions in its Australian operations in recent months, as well as delays in the rollout of its pharmacy franchise network.
Mr McNally told analysts that he was surprised by the 12 per cent fall in maternity bookings for the month of May, while also calling out that rehab bookings also fell with Ramsay getting more day program and mental health admissions in rehab.
Mr McNally expectedÂ operating conditions in both the UK and Australia to remain challenging.
“In addition to the recent slowdown in the UK, we are also facing more challenging market conditions in Australia with lower growth in procedural work and inpatient admissions, which has adversely impacted casemix in our Australian hospitals,” he said.
“Given the current climate around private health insurance and affordability, we expect this trend will continue into FY19.”
CSLAÂ analyst David Stanton told clients this morning that that while he had been concerned about the possibility of a downgrade, longer term there is positive potentialÂ for Ramsay.
“We continue to believe there is a high correlation between Ramsay opening a brownfield operating theatre in Australia and EBITÂ growth the following year,” he said.Â
Last financial year, RamsayÂ opened 10 theatres and this yearÂ that number will be seven, in response to industry over-investment in theatresÂ in prior years.Â
Dr Stanton saidÂ with 13 Australian theatresÂ slated to openÂ next fiscal year, Ramsay plans to return to growth, which will drive group EBITÂ expansion in 2020.
“Our channel checks suggest its competitors are not planning to open new theatres over the medium term, paving the way for the company to again drive margins from new brownfieldÂ operating theatres,” he added.Â
“On a three-year view, a resolution of issues in the French market and the UK’s National Health Service are other positive catalysts.”
Credit Suisse analyst Gretel JanuÂ recently declared that affordability of private hospital services is becoming a factor in a nation with a viable – and free – public care option.
Australians are shunning private health insurance (PHI) as premiums have increased faster than wage growth, denting private hospitals volume growth. About 45.5 per cent of Australians had PHI for hospital coverage in March, a fall fromÂ 47.4 per cent three years ago.
Adding to the problem for private hospitals is the decline of use of private health insurance within private hospitals due to more people going into public hospitals. AÂ rise in out of pocket surgery costs also is a problem.
Mr McNally said RamsayÂ will continue to invest strategically in brownfield expansions, which will underpin long-term growth, while at the same time implementing a range of cost management and procurement strategies which will help it deliver cost-effective healthcare.
He added the company is keen toÂ grow viaÂ acquisition and was currently investigating a range of acquisition opportunities.