We maintain our AUD 87 per share fair value estimate for narrow-moat Ramsay Health Care ahead of the release of fiscal 2017 results on Aug. 30, 2017. As such, we forecast earnings of AUD 522 million, versus consensus estimates of AUD 537 million. The shares are currently trading at a 16% discount to our intrinsic assessment and are therefore undervalued, in our opinion. Industry sources cite total community pharmacies currently operating under the Ramsay banner as having reached 29, up from 22 at Dec. 31, 2016 and tracking well ahead of our estimates. The pharmacy initiative which was unveiled back in August 2016 is essentially a franchise model (given current regulatory restrictions which limit ownership to practising registered pharmacists) and as such are contingent on signing up existing community pharmacies close to Ramsay’s existing hospital sites. Ramsay is targeting around 300 community pharmacies by 2020, which we think is ambitious given current ownership and Pharmacy location rules. That said, the Kings review now under way will provide recommendations on future remuneration, regulation including pharmacy location rules, and other arrangements that apply to pharmacies for the dispensing of medicines and other services provided under the Pharmaceutical Benefits Scheme. As such, a deregulation of ownership rules before or by 2020 could see an acceleration of the
pharmacy push.

In any case, we remain positive on the strategy, and along with the global procurement initiative and set against 200 existing hospital pharmacy dispensaries already operating across the global hospital portfolio, it leverages Ramsay’s substantial purchasing power into pharmaceuticals. Importantly, given the ageing demographic, it also expands the company’s hospital-based service model beyond acute settings and into chronic disease management in Australia.

Analyst: Chris Kallos, CFA

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