Category: Expert Insights
Expert Insights is a collective gallery of knowledge and information packed articles/ blogs/ podcasts from the Industry Captains as well as the Sr. Research Analysts from our team.
Business Strategy and Outlook
Ramsay’s strong 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 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.
Despite various pandemic pressures weighing on Ramsay, the firm is increasing its capital expenditure to better position itself for long-term growth. The key areas of investment are brownfield and greenfield expansions in Australia, and digital overseas. Ramsay is focusing on increasing its day surgery capacity as the proportion of day surgeries at Australian private hospitals has increased to roughly 65% from 60% in the last 10 years. The firm also sees opportunity for integrated care and higher-margin non-surgical ancillary services such as rehabilitation and mental health.
Financial Strength
Ramsay’s planned acquisition of Spire Healthcare in 2021 didn’t eventuate leaving the company in a stronger financial position as a result with pro forma net debt/EBITDA pre-AASB 16 of 0.7 at July 2021. However, due to the pandemic weighing on earnings, the acquisition of Elysium, and sustained elevated planned capital expenditures, it is forecasted leverage to peak at 3.3 in fiscal 2022 but fall under 2.0 by fiscal 2026. As Ramsay Australia owns most of its properties, the group has extra optionality if ever capital constrained. While free cash flow conversion of earnings averaged 98% over the last five years, it was boosted in fiscal 2020 due to the French government prefunding all outsourced work which contributed to a working capital inflow of AUD 526 million.
The dividend is largely underpinned by the Australian business.The capital structure includes AUD 252 million of Convertible Adjustable Rate Equity Securities, or CARES, on which Ramsay pays a fully franked dividend equivalent to a margin of 4.85% over the 180-day bank bill swap rate after tax which is high in the current funding environment. The CARES funding is not material in terms of the capital structure of the business overall, but it is unclear to us why the securities were allowed to step up to this high rate rather than being refinanced given the availability of cheaper debt. Review of the largest CARES holders doesn’t reveal any material related parties.
Bulls Say’s
- Ramsay boasts leading market positions in most of its geographies and benefits from negotiating power with payers and cost advantage derived from scale.
- Ramsay is a stable compounder with its healthcare services being highly defensive and underpinned by strong demographic factors.
- Its premium Australian business is being diluted by lower-margin and lower-return businesses overseas with higher exposures to publicly outsourced work and associated regulatory risk.
Company Profile
Ramsay Health Care is one of the largest private healthcare providers in the world, with over 460 facilities across 10 countries. The key markets in which it operates are Australia, France, the U.K., and Sweden. It is the largest private hospital group in each of these markets except for the U.K. where it ranks fifth. Ramsay Sante, which operates the European regions other than the U.K., is a 52.5%-owned subsidiary of Ramsay Health Care. The company typically earns about 60% of consolidated earnings in Australia and 30% in France. Ramsay Health Care undertakes both private and publicly funded healthcare.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook:
While AbbVie holds a strong portfolio of marketed and pipeline drugs, the increasing competition to the company’s key drug Humira should slow the growth for the company. At close to 40% of total sales and a higher portion of earnings (due to higher margin revenue), Humira is a key determinant of AbbVie’s earnings performance over the next three years.
Beyond immunology, cancer drug Imbruvica is the next-biggest sales contributor. Imbruvica’s strong clinical data in several forms of blood cancer should lead to peak sales above $6 billion. Additionally, the recent acquisition of Allergan brings several new products, including Botox for both cosmetic and therapeutic uses. Botox’s strong entrenchment bodes well for the treatment as new competition is emerging. Also, AbbVie holds several mature drugs with patent expirations long past, but with manufacturing or specific dosing complexities, which make generic competition less likely. Looking forward, AbbVie’s pipeline is weighted more toward new cancer and immunology drugs. The company should be able to leverage its solid entrenchment with Humira and Imbruvica to launch the new drugs.
Financial Strength:
AbbVie’s acquisition of Allergan significantly increased its debt level. The firm’s net debt position to peak at close to $70 billion in 2020, but given the strong cash flows of AbbVie’s base business and the acquired cash flows from the Allergan deal, the firm is expected to rapidly pay down debt while still financing the dividend. However, it is not expected that AbbVie will have much room to make any other significant acquisitions for several years while capital is tied up paying down debt and funding the robust dividend.
Bulls Say:
- AbbVie supports a strong dividend yield, which should act as valuation support, as the cash flows to support the dividend look secure over the next few years.
- AbbVie’s increasing entrenchment in blood cancers should bode well for growth as pricing power remains solid in this therapeutic area of the pharmaceutical market.
- AbbVie’s next generation immunology drugs targeting the IL23 and JAK pathways should help mitigate the competitive threats facing Humira.
Company Profile:
AbbVie is a pharmaceutical company with a strong exposure to immunology and oncology. The company’s top drug, Humira, represents close to half of the company’s current profits. The company was spun off from Abbott in early 2013. The recent acquisition of Allergan adds several new drugs in aesthetics and women’s health.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Paychex’s offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. Paychex’s solutions span from do-it-yourself payroll with add-on human capital management modules to full-service HR outsourcing via an administrative services organization or professional employer organization model. The ASO and PEO solutions allow a business to outsource critical HR functions to Paychex, including payroll, compliance, and benefits administration, and access support from onsite HR professionals. The main difference between the two models is that under a PEO, Paychex enters a co-employment arrangement and acts as the employer of record for tax and insurance purposes.
Financial Strength
Paychex is in a strong financial position. At the end of fiscal 2021, Paychex had a net cash position of over $300 million including restricted cash and total corporate investments. In fiscal 2019, the company issued $800 million of fixed-rate long-term debt to fund the $1.2 billion acquisition of PEO business Oasis. Paychex has returned nearly $7 billion of capital to shareholders during the eight years to fiscal 2021 primarily through dividends and to a lesser extent share repurchases. It is expected that Paychex’s strong free cash flow generation will support an 80% dividend payout ratio over our forecast period.
Paychex’s medium-term outlook due to resilient revenue retention and stronger demand for complementary HCM solutions than previously anticipated, underpinning our 4% fair value estimate increase to $110 per share. At current prices, Paychex’s shares screen as overvalued trading at a 21% premium to our updated fair value estimate. Management now expects fiscal 2022 adjusted EPS growth to be about 19%, from about 13% previously.
Bull Say’s
- Paychex is well placed to benefit from increased regulatory complexity under a U.S. Democratic administration.
- Paychex benefits from high customer switching costs, a scale-based cost advantage, and strong brand assets and a referral network built over many decades.
- Paychex dominates the small-business outsourced payroll market with strong prospects of further market penetration.
Company Profile
Paychex is a leading provider of payroll, human capital management, and insurance solutions servicing small and midsize clients primarily in the United States. The company, established in 1979, services over 710,000 clients and pays over 1 in 12 U.S. private-sector workers. Alongside its traditional payroll services, Paychex offers HCM solutions such as benefits administration and time and attendance software, as well as human resources outsourcing and insurance brokering.
(Source: BanyanTree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
